公司财务原理 第八版 (布雷利 著) 机械工业出版社 课后答案 283页

'课后答案网您最真诚的朋友www.hackshp.cn网团队竭诚为学生服务，免费提供各门课后答案，不用积分，甚至不用注册，旨在为广大学生提供自主学习的平台！课后答案网：www.hackshp.cn视频教程网：www.efanjy.comPPT课件网：www.ppthouse.com 课后答案网，用心为你服务！大学答案---中学答案---考研答案---考试答案最全最多的课后习题参考答案，尽在课后答案网（www.khdaw.com）！Khdaw团队一直秉承用心为大家服务的宗旨，以关注学生的学习生活为出发点，旨在为广大学生朋友的自主学习提供一个分享和交流的平台。爱校园（www.aixiaoyuan.com）课后答案网（www.khdaw.com）淘答案（www.taodaan.com）课后答案网www.hackshp.cn CHAPTER2PresentValues,TheObjectivesoftheFirm,andCorporateGovernanceAnswerstoPracticeQuestions1.Thefacevalueofthetreasurysecurityis$1,000.Ifthissecurityearns5%,theninoneyearwewillreceive$1,050.Thus:NPV=C0+[C1/(1+r)]=−$1000+($1050/1.05)=0Thisisnotasurprisingresultbecause5percentistheopportunitycostofcapital,i.e.,5percentisthereturnavailableinthecapitalmarket.Ifanyinvestmentkhdaw.comearnsarateofreturnequaltotheopportunitycostofcapital,theNPVofthatinvestmentiszero.2.NPV=−$1,300,000+($1,500,000/1.10)=+$63,636SincetheNPVispositive,youwouldconstructthemotel.Alternatively,wecancomputerasfollows:r=($1,500,000/$1,300,000)–1=0.1539=15.39%Sincetherateofreturnisgreaterthanthecostofcapital,youwouldconstructthemotel.课后答案网3.InvestmentNPVReturnwww.hackshp.cn(1)18,00018,000−10,000−10,000+=$5,000=0.80=80.0%1.2010,000(2)9,0009,000−5,000−5,000+=$2,500=0.80=80.0%1.205,000(3)5,7005,700−5,000−5,000+=−$250=0.14=14.0%1.205,000(4)4,0004,000−2,000−2,000+=$1,333.33=1.00=100.0%1.202,000a.Investment1,becauseithasthehighestNPV.b.Investment1,becauseitmaximizesshareholders’wealth.1khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.a.NPV=(−$50,000+$20,000)+($38,000/1.05)=$6,190.48b.NPV=(−$50,000+$20,000)+($38,000/1.10)=$4,545.45InPart(a),theNPVishigherthantheNPVoftheofficebuilding($5,000);therefore,weshouldacceptE.Coli’soffer.InPart(b),theNPVislessthantheNPVoftheofficebuilding,soweshouldnotaccepttheoffer.Youcanalsothinkofthisinanotherway.Thetrueopportunitycostofthelandiswhatyoucouldsellitfor,i.e.,$56,190(or$54,545).At$56,190,theofficebuildinghasanegativeNPV.At$54,545,theofficebuildinghasapositiveNPV.5.a.NPV=−$2,000,000+[($2,000,000×1.05)/1.05]=$0khdaw.comb.NPV=−$900,000+[($900,000×1.07)/1.10]=−$24,545.45Thecorrectdiscountrateis10%becausethisistheappropriaterateforaninvestmentwiththelevelofriskinherentinNorman’snephew’srestaurant.TheNPVisnegativebecauseNormanwillnotearnenoughtocompensatefortherisk.c.NPV=−$2,000,000+[($2,000,000×1.12)/1.12]=$0d.NPV=−$1,000,000+($1,100,000/1.12)=−$17,857.14Normanshouldinvestineithertherisk-freegovernmentsecuritiesorthe课后答案网riskystockmarket,dependingonhistoleranceforrisk.CorrectlypricedsecuritiesalwayshaveanNPV=0.6.a.Expectedrateofreturnonproject=www.hackshp.cn$2,100,000−$2,000,000=0.05=5.0%$2,000,000Thisisequaltothereturnonthegovernmentsecurities.b.Expectedrateofreturnonproject=$963,000−$900,000=0.07=7.0%$900,000Thisislessthanthecorrect10%rateofreturnforrestaurantswithsimilarrisk.c.Expectedrateofreturnonproject=$2,240,000−$2,000,000=0.12=12.0%$2,000,000Thisisequaltotherateofreturninthestockmarket.2khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com d.Expectedrateofreturnonproject=$1,100,000−$1,000,000=0.10=10.0%$1,000,000Thisislessthanthereturnintheequallyriskystockmarket.⎡$1,100,000+($1,600,000×1.12)⎤7.NPV=−$2,600,000+=−$17,857.14⎢⎥⎣1.12⎦TherateatwhichNormancanborrowdoesnotreflecttheopportunitycostoftheinvestments.Normanisstillinvesting$1,000,000at10%whiletheopportunitykhdaw.comcostofcapitalis12%.8.Theinvestment’spositiveNPVwillbereflectedinthepriceofScaledCompositesstock.Inordertoderiveacashflowfromherinvestmentthatwillallowhertospendmoretoday,Ms.Espinozacansellsomeofhersharesatthehigherpriceorshecanborrowagainsttheincreasedvalueofherholdings.9.DollarsNextYear课后答案网220,000216,000www.hackshp.cn203,704200,000DollarsNowa.Letx=theamountthatCaspershouldinvestnow.Then($200,000–x)istheamounthewillconsumenow,and(1.08x)istheamounthewillconsumenextyear.SinceCasperwantstoconsumeexactlythesameamounteachperiod:200,000–x=1.08x3khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Solving,wefindthatx=$96,153.85sothatCaspershouldinvest$96,153.85now,heshouldspend($200,000-$96,153.85)=$103,846.15now,andheshouldspend(1.08×$96,153.85)=$103,846.15nextyear.b.SinceCaspercaninvest$200,000at10%risk-free,hecanconsumeasmuchas($200,000×1.10)=$220,000nextyear.Thepresentvalueofthis$220,000is:($220,000/1.08)=$203,703.70ThereforeCaspercanconsumeasmuchas$203,703.70nowbyfirstinvesting$200,000at10%andthenborrowing,atthe8%rate,againstthe$220,000availablenextyear.Ifweusethe$203,703.70astheavailableconsumptionnow,andagainletx=theamountthatCaspershouldinvestnow,wecanthensolvethefollowingforx:khdaw.com$203,703.70–x=1.08xx=$97,934.47Therefore,Caspershouldinvest$97,934.47nowat8%,heshouldspend($203,703.70–$97,934.47)=$105,769.23now,andheshouldspend($97,934.47×1.08)=$105,769.23nextyear.[NotethatthisapproachleadstotheresultthatCasperborrows$203,703.70at8%andtheninvests$97,934.47at8%.Wecouldsimplysaythatheshouldborrow($203,703.70-$97,934.47)=$105,769.23at8%againstthe$220,000availablenextyear.Thisistheamountthathewillconsumenow.]课后答案网c.TheNPVoftheopportunityin(b)is:($203,703.70-$200,000)=$3,703.70www.hackshp.cn4khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Expectedcashflow=($8million+$12million+$16million)/3=$12millionb.Expectedrateofreturn=($12million/$8million)–1=0.50=50%c.Expectedcashflow=($8+$12+$16)/3=$12Expectedrateofreturn=($12/$10)–1=0.20=20%ThenetcashflowfromsellingthetankerloadisthesameasthepayofffromonemillionsharesofStockZineachstateoftheworldeconomy.Therefore,theriskofeachofthesecashflowsisthesame.khdaw.comd.NPV=−$8,000,000+($12,000,000/1.20)=+$2,000,000TheprojectisagoodinvestmentbecausetheNPVispositive.Investorswouldbepreparedtopayasmuchas$10,000,000fortheproject,whichcosts$8,000,000.2.a.Expectedcashflow(ProjectB)=($4million+$6million+$8million)/3Expectedcashflow(ProjectB)=$6millionExpectedcashflow(ProjectC)=($5million+$5.5million+$6million)/3课后答案网Expectedcashflow(ProjectC)=$5.5millionb.Expectedrateofreturn(StockX)=($110/$95.65)–1=0.15=15.0%Expectedrateofreturn(StockY)=($44/$40)–1=0.10=10.0%www.hackshp.cnExpectedrateofreturn(StockZ)=($12/$10)–1=0.20=20.0%c.PercentageDifferencesSlumpv.NormalBoomv.NormalProjectB4/6=66.67%8/6=133.33%ProjectC5/5.5=90.91%6/5.5=109.09%StockX80/110=72.73%140/110=127.27%StockY40/44=90.91%48/44=109.09%StockZ8/12=66.67%16/12=133.33%ProjectBhasthesameriskasStockZ,sothecostofcapitalforProjectBis20%.ProjectChasthesameriskasStockY,sothecostofcapitalforProjectCis10%.5khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com d.NPV(ProjectB)=−$5,000,000+($6,000,000/1.20)=0NPV(ProjectC)=−$5,000,000+($5,500,000/1.10)=0e.Thetwoprojectswilladdnothingtothetotalmarketvalueofthecompany’sshares.khdaw.com课后答案网www.hackshp.cn6khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER3HowtoCalculatePresentValuesAnswerstoPracticeQuestions1.10a.PV=$100/1.01=$90.5310b.PV=$100/1.13=$29.4615c.PV=$100/1.25=$3.5223khdaw.comd.PV=$100/1.12+$100/1.12+$100/1.12=$240.1812.a.DF==0.905⇒r1=0.1050=10.50%11+r111b.DF===0.819222(1+r)(1.105)2c.AF2=DF1+DF2=0.905+0.819=1.724d.PVofanannuity=C课后答案网×[Annuityfactoratr%fortyears]Here:$24.65=$10×[AF3]AF3=2.465www.hackshp.cne.AF3=DF1+DF2+DF3=AF2+DF32.465=1.724+DF3DF3=0.7413.Thepresentvalueofthe10-yearstreamofcashinflowsis:⎡11⎤PV=$170,000×⎢−10⎥=$886,739.66⎣0.140.14×(1.14)⎦Thus:NPV=–$800,000+$886,739.66=+$86,739.667khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Attheendoffiveyears,thefactory’svaluewillbethepresentvalueofthefiveremaining$170,000cashflows:⎡11⎤PV=$170,000×⎢−5⎥=$583,623.76⎣0.140.14×(1.14)⎦4.10Ct$50,000$57,000$75,000$80,000$85,000NPV=∑=−$380,000+++++t2345t=0(1.12)1.121.121.121.121.12$92,000$92,000$80,000$68,000$50,000+++++=$23,696.15khdaw.com1.1261.1271.1281.1291.12105.a.LetSt=salaryinyeart30S3040,000(1.05)t−13030t(40,000/1.05)38,095.24PV=∑t=∑t=∑t=∑tt=1(1.08)t=1(1.08)t=1(1.08/1.05)t=1(1.0286)⎡11⎤=38,095.24×⎢−30⎥=$760,379.21⎣0.02860.0286×(1.0286)⎦课后答案网b.PV(salary)x0.05=$38,018.96Futurevalue=$38,018.96x(1.08)30=$382,571.75c.www.hackshp.cn⎡11⎤PV=C×⎢−t⎥⎣rr×(1+r)⎦⎡11⎤$382,571.75=C×⎢−20⎥⎣0.080.08×(1.08)⎦⎡⎤11C=$382,571.75⎢−⎥=$38,965.78⎢0.080.08×(1.08)20⎥⎣⎦8khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.PresentPeriodValue0−400,000.001+100,000/1.12=+89,285.7122+200,000/1.12=+159,438.7833+300,000/1.12=+213,534.07Total=NPV=$62,258.567.Wecanbreakthisdownintoseveraldifferentcashflows,suchthatthesumoftheseseparatecashflowsisthetotalcashflow.Then,thesumofthepresentkhdaw.comvaluesoftheseparatecashflowsisthepresentvalueoftheentireproject.(Alldollarfiguresareinmillions.)°Costoftheshipis$8millionPV=−$8million°Revenueis$5millionperyear,operatingexpensesare$4million.Thus,operatingcashflowis$1millionperyearfor15years.⎡11⎤PV=$1million×⎢−15⎥=$8.559million⎣0.080.08×(1.08)⎦°Majorrefitscost$2millioneach,andwilloccurattimest=5andt=10.510PV=(−$2million)/1.08课后答案网+(−$2million)/1.08=−$2.288million°Saleforscrapbringsinrevenueof$1.5millionatt=15.15PV=$1.5million/1.08=$0.473millionAddingthesepresentvaluesgivesthepresentvalueoftheentireproject:www.hackshp.cnNPV=−$8million+$8.559million−$2.288million+$0.473millionNPV=−$1.256million8.a.PV=$100,0005b.PV=$180,000/1.12=$102,137c.PV=$11,400/0.12=$95,000⎡11⎤d.PV=$1,9000×⎢−10⎥=$107,354⎣0.120.12×(1.12)⎦e.PV=$6,500/(0.12−0.05)=$92,857Prize(d)isthemostvaluablebecauseithasthehighestpresentvalue.9khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.Mr.Bassetisbuyingasecurityworth$20,000now.Thatisitspresentvalue.Theunknownistheannualpayment.Usingthepresentvalueofanannuityformula,wehave:⎡11⎤PV=C×⎢−t⎥⎣rr×(1+r)⎦⎡11⎤$20,000=C×⎢−12⎥⎣0.080.08×(1.08)⎦⎡⎤11khdaw.comC=$20,000⎢−⎥=$2,653.90⎢0.080.08×(1.08)12⎥⎣⎦10.AssumetheZhangswillputasidethesameamounteachyear.Oneapproachtosolvingthisproblemistofindthepresentvalueofthecostoftheboatandthenequatethattothepresentvalueofthemoneysaved.Fromthisequation,wecansolvefortheamounttobeputasideeachyear.5PV(boat)=$20,000/(1.10)=$12,418⎡11⎤PV(savings)=Annualsavings×⎢−5⎥课后答案网⎣0.100.10×(1.10)⎦BecausePV(savings)mustequalPV(boat):⎡11⎤Annualsavingswww.hackshp.cn×⎢−5⎥=$12,418⎣0.100.10×(1.10)⎦⎡11⎤Annualsavings=$12,418⎢−5⎥=$3,276⎣0.100.10×(1.10)⎦Anotherapproachistofindthevalueofthesavingsatthetimetheboatispurchased.Becausetheamountinthesavingsaccountattheendoffiveyearsmustbethepriceoftheboat,or$20,000,wecansolvefortheamounttobeputasideeachyear.Ifxistheamounttobeputasideeachyear,then:4321x(1.10)+x(1.10)+x(1.10)+x(1.10)+x=$20,000x(1.464+1.331+1.210+1.10+1)=$20,000x(6.105)=$20,000x=$3,27610khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 11.ThefactthatKangarooAutosisoffering“freecredit”tellsuswhatthecashpaymentsare;itdoesnotchangethefactthatmoneyhastimevalue.A10percentannualrateofinterestisequivalenttoamonthlyrateof0.83percent:rmonthly=rannual/12=0.10/12=0.0083=0.83%ThepresentvalueofthepaymentstoKangarooAutosis:⎡11⎤$1,000+$300×⎢−⎥=$8,93830⎣0.00830.0083×(1.0083)⎦AcarfromTurtleMotorscosts$9,000cash.Therefore,KangarooAutosoffersthebetterdeal,i.e.,thelowerpresentvalueofcost.khdaw.com12.TheNPVsare:$100,000$320,000at5percent⇒NPV=−$170,000−+=$25,01121.05(1.05)$100,000320,000at10percent⇒NPV=−$170,000−+=$3,55421.10(1.10)$100,000320,000at15percent⇒NPV=−$170,000−+=−$14,99121.15(1.15)ThefigurebelowshowsthattheprojecthaszeroNPVatabout11percent.课后答案网Asacheck,NPVat11percentis:$100,000320,000NPV=−$170,000−+=−$37121.11(1.11)www.hackshp.cn302010NPVNPV0-10-200.050.100.15RateofInterest11khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 13.a.Thisistheusualperpetuity,andhence:C$100PV===$1,428.57r0.07b.ThisisworththePVofstream(a)plustheimmediatepaymentof$100:PV=$100+$1,428.57=$1,528.57c.Thecontinuouslycompoundedequivalenttoa7percentannuallycompoundedrateisapproximately6.77percent,because:0.0677e=1.0700khdaw.comThus:C$100PV===$1,477.10r0.0677Notethatthepatternofpaymentsinpart(b)ismorevaluablethanthepatternofpaymentsinpart(c).Itispreferabletoreceivecashflowsatthestartofeveryyearthantospreadthereceiptofcashevenlyovertheyear;withtheformerpatternofpayment,youreceivethecashmorequickly.14.a.PV=$100,000/0.08=$1,250,000b.PV=$100,000/(0.08–0.04)=$2,500,000课后答案网⎡11⎤c.PV=$100,000×⎢−20⎥=$981,815⎣0.080.08×(1.08)⎦www.hackshp.cnd.Thecontinuouslycompoundedequivalenttoan8percentannuallycompoundedrateisapproximately7.7percent,because:0.0770e=1.0800Thus:⎡11⎤PV=$100,000×−=$1,020,284⎢(0.077)(20)⎥⎣0.0770.077×e⎦ThisresultisgreaterthantheanswerinPart(c)becausetheendowmentisnowearninginterestduringtheentireyear.2015.Withannualcompounding:FV=$100×(1.15)=$1,636.65(0.15×20)Withcontinuouscompounding:FV=$100×e=$2,008.5512khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 16.Onewaytoapproachthisproblemistosolveforthepresentvalueof:(1)$100peryearfor10years,and(2)$100peryearinperpetuity,withthefirstcashflowatyear11.Ifthisisafairdeal,thesepresentvaluesmustbeequal,andthuswecansolvefortheinterestrate(r).Thepresentvalueof$100peryearfor10yearsis:⎡11⎤PV=$100×⎢−10⎥⎣r(r)×(1+r)⎦Thepresentvalue,asofyear10,of$100peryearforever,withthefirstpaymentinyear11,is:PV10=$100/rkhdaw.comAtt=0,thepresentvalueofPV10is:⎡1⎤⎡$100⎤PV=⎢10⎥×⎢⎥⎣(1+r)⎦⎣r⎦Equatingthesetwoexpressionsforpresentvalue,wehave:⎡11⎤⎡1⎤⎡$100⎤$100×⎢−10⎥=⎢10⎥×⎢⎥⎣r(r)×(1+r)⎦⎣(1+r)⎦⎣r⎦Usingtrialanderrororalgebraicsolution,wefindthatr=7.18%.课后答案网17.Assumetheamountinvestedisonedollar.LetArepresenttheinvestmentat12percent,compoundedannually.LetBrepresenttheinvestmentat11.7percent,compoundedsemiannually.LetCrepresenttheinvestmentat11.5percent,compoundedcontinuously.www.hackshp.cnAfteroneyear:1FVA=$1×(1+0.12)=$1.12002FVB=$1×(1+0.0585)=$1.1204(0.115×1)FVC=$1×e=$1.1219Afterfiveyears:5FVA=$1×(1+0.12)=$1.762310FVB=$1×(1+0.0585)=$1.7657(0.115×5)FVC=$1×e=$1.777113khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Aftertwentyyears:20FVA=$1×(1+0.12)=$9.646340FVB=$1×(1+0.0585)=$9.7193(0.115×20)FVC=$1×e=$9.9742ThepreferredinvestmentisC.18.1+rnominal=(1+rreal)×(1+inflationrate)NominalRealInterestInflationRatekhdaw.comInterestRateRate6.00%1.00%4.95%23.20%10.00%12.00%9.00%5.83%3.00%19.Thetotalelapsedtimeis113years.113At5%:FV=$100×(1+0.05)=$24,797113At10%:FV=$100×(1+0.10)=$4,757,44120.Becausethecashflowsoccureverysixmonths,weuseasix-monthdiscount课后答案网rate,here8%/2,or4%.Thus:⎡11⎤PV=$100,000+$100,000×⎢−9⎥=$843,533www.hackshp.cn⎣0.040.04×(1.04)⎦21.a.Eachinstallmentis:$9,420,713/19=$495,827⎡11⎤PV=$495,827×⎢−19⎥=$4,761,724⎣0.080.08×(1.08)⎦b.IfERCiswillingtopay$4.2million,then:⎡11⎤$4,200,000=$495,827×⎢−19⎥⎣rr×(1+r)⎦UsingExcelorafinancialcalculator,wefindthatr=9.81%.14khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ⎡11⎤22.a.PV=$70,000×⎢−8⎥=$402,264.73⎣0.080.08×(1.08)⎦b.Beginning-Year-endTotalAmortizationEnd-of-YearYearof-YearInterestonYear-endofLoanBalanceBalanceBalancePayment1402,264.7332,181.1870,000.0037,818.82364,445.912364,445.9129,155.6770,000.0040,844.33323,601.583323,601.5825,888.1370,000.0044,111.87279,489.714279,489.7122,359.1870,000.0047,640.82231,848.885231,848.8818,547.9170,000.0051,452.09180,396.796180,396.7914,431.7470,000.0055,568.26124,828.54khdaw.com7124,828.549,986.2870,000.0060,013.7264,814.82864,814.825,185.1970,000.0064,814.810.0123.Thisisanannuityproblemwiththepresentvalueoftheannuityequalto$2million(asofyourretirementdate),andtheinterestrateequalto8percent,with15timeperiods.Thus,yourannuallevelofexpenditure(C)isdeterminedasfollows:⎡11⎤PV=C×⎢−t⎥⎣rr×(1+r)⎦课后答案网⎡11⎤$2,000,000=C×⎢−15⎥⎣0.080.08×(1.08)⎦www.hackshp.cn⎡⎤11C=$2,000,000⎢−⎥=$233,659⎢0.080.08×(1.08)15⎥⎣⎦Withaninflationrateof4percentperyear,wewillstillaccumulate$2millionasofourretirementdate.However,becausewewanttospendaconstantamountperyearinrealterms(R,constantforallt),thenominalamount(Ct)mustincreaseeachyear.Foreachyeart:tR=Ct/(1+inflationrate)15khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Therefore:tPV[allCt]=PV[allR×(1+inflationrate)]=$2,000,0001215⎡(1+0.04)(1+0.04)(1+0.04)⎤R×⎢1+2+...+15⎥=$2,000,000⎣(1+0.08)(1+0.08)(1+0.08)⎦R×[0.9630+0.9273+...+0.5677]=$2,000,000R×11.2390=$2,000,000R=$177,952ThusC1=($177,952×1.04)=$185,070,C2=$192,473,etc.khdaw.com24.First,withnominalcashflows:a.Thenominalcashflowsformagrowingperpetuityattherateofinflation,4%.Thus,thecashflowinoneyearwillbe$416,000and:PV=$416,000/(0.10–0.04)=$6,933,333b.Thenominalcashflowsformagrowingannuityfor20years,withanadditionalpaymentof$5millionatyear20:t⎡11(1+g)⎤$5,000,000PV=C−×⎥+=1⎢tt⎣(r课后答案网-g)(r−g)(1+r)⎦(1+r)⎡11(1.04)20⎤$5,000,000$416,000⎢−×20⎥+20=⎣(0.10www.hackshp.cn-0.04)(0.10-0.04)(1.10)⎦(1.10)$5,418,389Second,withrealcashflows:a.Here,therealcashflowsare$400,000peryearinperpetuity,andwecanfindtherealrate(r)bysolvingthefollowingequation:(1+0.10)=(1+r)×(1+0.04)⇒r=0.05769=5.769%PV=$400,000/(0.05769)=$6,933,61116khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Now,therealcashflowsare$400,000peryearfor20yearsand$5million(nominal)in20years.Inrealterms,the$5milliondollarpaymentis:20$5,000,000/(1.04)=$2,281,935Thus,thepresentvalueoftheprojectis:⎡11⎤$2,281,935PV=$400,000×⎢−20⎥+20=$5,418,510⎣(0.05769)(0.05769)(1.05769)⎦(1.05769)[Asnotedinthestatementoftheproblem,theanswersagree,towithinroundingerrors.]25.khdaw.comLetxbethefractionofMs.Pool’ssalarytobesetasideeachyear.Atanypointinthefuture,t,herrealincomewillbe:t($40,000)(1+0.02)Therealamountsavedeachyearwillbe:t(x)($40,000)(1+0.02)Thepresentvalueofthisamountis:t(x)($40,000)(1+0.02)t(1+0.05)Ms.Poolwantstohave$500,000,inrealterms,30yearsfromnow.Thepresent课后答案网valueofthisamount(atarealrateof5percent)is:30$500,000/(1+0.05)Thus:www.hackshp.cn30t$500,000(x)($40,000)(1.02)30=∑t(1.05)t=1(1.05)30t$500,000($40,000)(1.02)30=(x)∑t(1.05)t=1(1.05)$115,688.72=(x)($790,012.82)x=0.14617khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.UsingtheRuleof72,thetimeformoneytodoubleat12percentis72/12,or6years.Moreprecisely,ifxisthenumberofyearsformoneytodouble,then:x(1.12)=2Usinglogarithms,wefind:x(ln1.12)=ln2x=6.12yearskhdaw.comb.Withcontinuouscompoundingforinterestraterandtimeperiodx:rxe=2Takingthenaturallogarithmofeachside:rx=ln(2)=0.693Thus,ifrisexpressedasapercent,thenx(thetimeformoneytodouble)is:x=69.3/(interestrate,inpercent).2.Spreadsheetexercise.课后答案网3.a.Thiscallsforthegrowingperpetuityformulawithanegativegrowthrate(g=–0.04):www.hackshp.cn$2million$2millionPV===$14.29million0.10−(−0.04)0.14b.Thepipeline’svalueatyear20(i.e.,att=20),assumingitscashflowslastforever,is:20CC(1+g)211PV==20r−gr−gWithC1=$2million,g=–0.04,andr=0.10:20($2million)×(1−0.04)$0.884millionPV===$6.314million200.140.14Next,weconvertthisamounttoPVtoday,andsubtractitfromtheanswertoPart(a):$6.314millionPV=$14.29million−=$13.35million20(1.10)18khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER4TheValueofBondsandCommonStocksAnswerstoPracticeQuestions1.Withannualcouponpayments:⎡11⎤1,000PV=60×⎢−5⎥+5=1,089.04⎣0.040.04×(1.04)⎦(1.04)Withsemi-annualcouponpayments:⎡11⎤1,000khdaw.comPV=30×⎢−10⎥+10=1,089.83⎣0.020.02×(1.02)⎦(1.02)2.Withannualcouponpayments:⎡11⎤1,000PV=60×⎢−5⎥+5=1,137.39⎣0.030.03×(1.03)⎦(1.03)Withsemi-annualcouponpayments:⎡11⎤1,000PV=30×⎢课后答案网−10⎥+10=1,138.33⎣0.0150.015×(1.015)⎦(1.015)3.Purchasepricefora6-yeargoverwww.hackshp.cnnmentbondwith5percentannualcoupon:⎡11⎤1,000PV=50×⎢−6⎥+6=1,108.34⎣0.030.03×(1.03)⎦(1.03)Priceoneyearlater(yield=3%):⎡11⎤1,000PV=50×⎢−5⎥+5=1,091.59⎣0.030.03×(1.03)⎦(1.03)Rateofreturn=[$50+($1,091.59–$1,108.34)]/$1,108.34=3.00%Priceoneyearlater(yield=2%):⎡11⎤1,000PV=50×⎢−5⎥+5=1,141.40⎣0.020.02×(1.02)⎦(1.02)Rateofreturn=[$50+($1,141.40–$1,108.34)]/$1,108.34=7.49%4.Newspaperexercise,answerswillvary19khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.ExpectedFutureValuesPresentValuesHorizonDividendPriceCumulativeFutureTotalPeriod(H)(DIVt)(Pt)DividendsPrice0100.00100.00100.00110.00105.008.7091.30100.00210.50110.2516.6483.36100.00311.03115.7623.8976.11100.00411.58121.5530.5169.50100.001015.51162.8959.7440.26100.002025.27265.3383.7916.21100.0050109.211,146.7498.941.06100.00khdaw.com1001,252.3913,150.1399.990.01100.00Assumptions1.Dividendsincreaseat5%peryearcompounded.2.Capitalizationrateis15%.6.a.Usingthegrowingperpetuityformula,wehave:P0=Div1/(r–g)73=1.68/(r-0.085)r=0.108=10.8%课后答案网b.Weknowthat:Plowbackratio=1.0–payoutratio=1.0–0.5=0.5And,wealsoknowthat:www.hackshp.cndividendgrowthrate=g=plowbackratio×ROEg=0.5×0.12=0.06=6.0%Usingthisestimateofg,wehave:P0=Div1/(r–g)73=1.68/(r–0.06)r=0.0830=8.30%20khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com DIV$1017.P===$100.00Ar0.10DIV$51P===$83.33Br−g0.10−0.04DIV1DIV2DIV3DIV4DIV5DIV6⎛DIV71⎞PC=1+2+3+4+5+6+⎜×6⎟1.101.101.101.101.101.10⎝0.101.10⎠5.006.007.208.6410.3712.44⎛12.441⎞P=++++++⎜×⎟=$104.50C12345661.101.101.101.101.101.10⎝0.101.10⎠khdaw.comAtacapitalizationrateof10percent,StockCisthemostvaluable.Foracapitalizationrateof7percent,thecalculationsaresimilar.Theresultsare:PA=$142.86PB=$166.67PC=$156.48Therefore,StockBisthemostvaluable.8.a.Weknowthatg,thegrowthrateofdividendsandearnings,isgivenby:g=plowbackratio×ROE=0.40×0.20=0.08=8.0%课后答案网Weknowthat:r=(DIV1/P0)+g=dividendyield+growthrateTherefore:www.hackshp.cnr=0.04+0.08=0.12=12.0%b.Dividendyield=4%.Therefore:DIV1/P0=0.04DIV1=0.04×P0Aplowbackratioof0.4impliesapayoutratioof0.6,andhence:DIV1/EPS1=0.6DIV1=0.6×EPS1EquatingthesetwoexpressionsforDIV1givesarelationshipbetweenpriceandearningspershare:0.04×P0=0.6×EPS1P0/EPS1=1521khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Also,weknowthat:EPS⎡PVGO⎤1=r×⎢1−⎥PP0⎣0⎦With(P0/EPS1)=15andr=0.12,theratioofthepresentvalueofgrowthopportunitiestopriceis44.4percent.Thus,iftherearesuddenlynofutureinvestmentopportunities,thestockpricewilldecreaseby44.4percent.c.InPart(b),allfutureinvestmentopportunitiesareassumedtohaveanetpresentvalueofzero.Ifallfutureinvestmentopportunitieshavearateofreturnequaltothecapitalizationrate,thisisequivalenttothestatementkhdaw.comthatthenetpresentvalueoftheseinvestmentopportunitiesiszero.Hence,theimpactonsharepriceisthesameasinPart(b).9.Internetexercise;answerswillvarydependingontimeperiod.10.Internetexercise;answerswillvarydependingontimeperiod.11.Usingtheconceptthatthepriceofashareofcommonstockisequaltothepresentvalueofthefuturedividends,wehave:DIVDIVDIV⎡1DIV⎤1234P=+课后答案网2+3+⎢3×⎥(1+r)(1+r)(1+r)⎣(1+r)(r−g)⎦123⎡1(3×1.06)⎤50=+2+3+⎢3×⎥(1+r)www.hackshp.cn(1+r)(1+r)⎣(1+r)(r−0.06)⎦Usingtrialanderror,wefindthatrisapproximately11.12percent.12.a.AnIncorrectApplication.HotshotSemiconductor’searningsanddividendshavegrownby30percentperyearsincethefirm’sfoundingtenyearsago.Currentstockpriceis$100,andnextyear’sdividendisprojectedat$1.25.Thus:DIV11.25r=+g=+0.30=0.3125=31.25%P1000Thisiswrongbecausetheformulaassumesperpetualgrowth;itisnotpossibleforHotshottogrowat30percentperyearforever.22khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ACorrectApplication.TheformulamightbecorrectlyappliedtotheOldFaithfulRailroad,whichhasbeengrowingatasteady5percentratefordecades.ItsEPS1=$10,DIV1=$5,andP0=$100.Thus:DIV51r=+g=+0.05=0.10=10.0%P1000Evenhere,youshouldbecarefulnottoblindlyprojectpastgrowthintothefuture.IfOldFaithfulhaulscoal,anenergycrisiscouldturnitintoagrowthstock.b.AnIncorrectApplication.Hotshothascurrentearningsof$5.00pershare.Thus:EPS5khdaw.comr=1==0.05=5.0%P1000Thisistoolowtoberealistic.ThereasonP0issohighrelativetoearningsisnotthatrislow,butratherthatHotshotisendowedwithvaluablegrowthopportunities.SupposePVGO=$60:EPS1P=+PVGO0r5100=+60rTherefore,r=12.5%课后答案网ACorrectApplication.Unfortunately,OldFaithfulhasrunoutofvaluablegrowthopportunities.SincePVGO=0:EPSwww.hackshp.cn1PVGOP=+0r10100=+0rTherefore,r=10.0%EPSNPV113.Shareprice=+rr−gTherefore:EPSα1NPVαΡ=+αr(r−0.15)ααEPSNPVβ1βΡ=+βr(r−0.08)ββ23khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Thestatementinthequestionimpliesthefollowing:NPVβ⎛⎜EPSβ1NPVβ⎞⎟NPVα⎛⎜EPSα1NPVα⎞⎟+>+(r−0.08)⎜r(r−0.08)⎟(r−0.15)⎜r(r−0.15)⎟β⎝ββ⎠α⎝αα⎠Rearranging,wehave:NPVαrαNPVβrβ×<×(r−0.15)EPS(r−0.08)EPSαα1ββ1a.NPVα(rβ-0.08),everythingelseequal.khdaw.comNPVαNPVβc.<,everythingelseequal.(r−0.15)(r−0.08)αβrαrβd.<,everythingelseequal.EPSEPSα1β114.a.Growth-Tech’sstockpriceshouldbe:$0.50$0.60$1.15⎛1$1.24⎞P=+++⎜×⎟=$23.8123⎜3⎟(1.12)(1.12)(1.12)⎝(1.12)(0.12−0.08)⎠课后答案网b.Thehorizonvaluecontributes:1$1.24PV(P)=×=$22.07H3www.hackshp.cn(1.12)(0.12−0.08)c.WithoutPVGO,P3wouldequalearningsforyear4capitalizedat12percent:$2.49=$20.750.12Therefore:PVGO=$31.00–$20.75=$10.25d.ThePVGOof$10.25islostatyear3.Therefore,thecurrentstockpriceof$23.81willdecreaseby:$10.25=$7.303(1.12)Thenewstockpricewillbe:$23.81–$7.30=$16.5124khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 15.Internetexercise;answerswillvarydependingontimeperiod.16.a.HerewecanapplythestandardgrowingperpetuityformulawithDIV1=$4,g=0.04andP0=$100:DIV1$4r=+g=+0.04=0.08=8.0%P$1000The$4dividendis60percentofearnings.Thus:EPS1=4/0.6=$6.67Also:EPS1khdaw.comP0=+PVGOr$6.67$100=+PVGO0.08PVGO=$16.63b.DIV1willdecreaseto:0.20×6.67=$1.33However,byplowingback80percentofearnings,CSIwillgrowby8percentperyearforfiveyears.Thus:Year1234567,课后答案网8...DIVt1.331.441.551.681.815.88ContinuedgrowthatEPSt6.677.207.788.409.079.804percentNotethatDIVwww.hackshp.cn6increasessharplyasthefirmswitchesbacktoa60percentpayoutpolicy.Forecastedstockpriceinyear5is:DIV5.88P=6==$1475r−g0.08−0.04Therefore,CSI’sstockpricewillincreaseto:1.331.441.551.681.81+147P=++++=$106.21023451.081.081.081.081.0825khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 17.ExpectedFutureValuesPresentValuesHorizonDividendPriceCumulativeFuturePeriod(H)(DIVt)(Pt)DividendsPriceTotal0100.00100.00100.00115.00100.0013.0486.96100.0025.00110.0016.8283.18100.0035.50121.0020.4479.56100.0046.05133.1023.9076.10100.001010.72235.7941.7258.28100.002027.80611.5962.6337.37100.0050485.0910,671.9090.159.85100.00khdaw.com10056,944.681,252,782.9498.931.07100.00Inordertopaytheextradividend,thecompanyneedstoraiseanextra$10pershareinyear1.Thenewshareholderswhoprovidethiscashwilldemandadividendof$0.50pershareinyear2,$0.55inyear3,andsoon.Thus,eacholdsharewillreceivedividendsof$15inyear1,($5.50–$0.50)=$5inyear2,($6.05–$0.55)=$5.50inyear3,andsoon.Thepresentvalueofashareatyear1iscomputedasfollows:$15⎛$51⎞PV=+⎜×⎟=$100.001.15⎝0.15-0.101.15⎠课后答案网www.hackshp.cn26khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Spreadsheetexercise2.Fromtheequationgivenintheproblem,itfollowsthat:PROE×(1−b)1−b0==BVPSr−(b×ROE)(r/ROE)−bConsiderthreecases:khdaw.comROEr⇒(P0/BVPS)>1Thus,asROEincreases,theprice-to-bookratioalsoincreases,and,whenROE=r,price-to-bookequalsone.3.Assumetheportfoliovaluegiven,$100million,isthevalueasoftheendofthefirstyear.Then,assumingconstantgrowth,thevalueofthecontractisgivenbythefirstpayment(0.5percentofportfoliovalue)dividedby(r–g).Also:r=dividendyield+growthrate课后答案网Hence:r–growthrate=dividendyield=0.05=5.0%Thus,thevalueofthecontract,V,is:www.hackshp.cn0.005×$100millionV==$10million0.05Forstockswitha4percentyield:r–growthrate=dividendyield=0.04=4.0%Thus,thevalueofthecontract,V,is:0.005×$100millionV==$12.5million0.0427khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER5WhyNetPresentValueLeadstoBetterInvestmentDecisionsThanOtherCriteriaAnswerstoPracticeQuestions$10001.a.NPV=−$1000+=−$90.91A(1.10)$1000$1000$4000$1000$1000NPV=−$2000+++++=+$4,044.73B2345(1.10)(1.10)(1.10)(1.10)(1.10)khdaw.com$1000$1000$1000$1000NPV=−$3000++++=+$39.47C245(1.10)(1.10)(1.10)(1.10)b.PaybackA=1yearPaybackB=2yearsPaybackC=4yearsc.AandB2.a.WhenusingtheIRRrule,thefirmmuststillcomparetheIRRwiththeopportunitycostofcapital.Thus,evenwiththeIRRmethod,onemust课后答案网specifytheappropriatediscountrate.b.Riskycashflowsshouldbediscountedatahigherratethantherateusedtodiscountlessriskycashflows.Usingthepaybackruleisequivalenttowww.hackshp.cnusingtheNPVrulewithazerodiscountrateforcashflowsbeforethepaybackperiodandaninfinitediscountrateforcashflowsthereafter.3.r=-17.44%0.00%10.00%15.00%20.00%25.00%45.27%Year0-3,000.00-3,000.00-3,000.00-3,000.00-3,000.00-3,000.00-3,000.00-3,000.00Year13,500.004,239.343,500.003,181.823,043.482,916.672,800.002,409.31Year24,000.005,868.414,000.003,305.793,024.572,777.782,560.001,895.43Year3-4,000.00-7,108.06-4,000.00-3,005.26-2,630.06-2,314.81-2,048.00-1,304.76PV=-0.31500.00482.35437.99379.64312.00-0.02ThetwoIRRsforthisprojectare(approximately):–17.44%and45.27%Betweenthesetwodiscountrates,theNPVispositive.28khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.a.Thefigureonthenextpagewasdrawnfromthefollowingpoints:DiscountRate0%10%20%NPVA+20.00+4.13-8.33NPVB+40.00+5.18-18.98b.Fromthegraph,wecanestimatetheIRRofeachprojectfromthepointwhereitslinecrossesthehorizontalaxis:IRRA=13.1%andIRRB=11.9%c.ThecompanyshouldacceptProjectAifitsNPVispositiveandhigherkhdaw.comthanthatofProjectB;thatis,thecompanyshouldacceptProjectAifthediscountrateisgreaterthan10.7%(theintersectionofNPVAandNPVBonthegraphbelow)andlessthan13.1%.d.Thecashflowsfor(B–A)are:C0=$0C1=–$60C2=–$60C3=+$140Therefore:Discount课后答案网Rate0%10%20%NPVB-A+20.00+1.05-10.65IRRB-A=10.7%ThecompanyshouldacceptProjectAifthediscountrateisgreaterthanwww.hackshp.cn10.7%andlessthan13.1%.Asshowninthegraph,forthesediscountrates,theIRRfortheincrementalinvestmentislessthantheopportunitycostofcapital.29khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 50.0040.0030.0020.00ProjectA10.00ProjectBNPV0.00Increment-10.00khdaw.com-20.00-30.000%10%20%RateofInterest5.a.BecauseProjectArequiresalargercapitaloutlay,itispossiblethatProjectAhasbothalowerIRRandahigherNPVthanProjectB.(Infact,NPVAisgreaterthanNPVBforalldiscountrateslessthan10percent.)Becausethegoalistomaximizeshareholderwealth,NPVisthecorrectcriterion.课后答案网b.TousetheIRRcriterionformutuallyexclusiveprojects,calculatetheIRRfortheincrementalcashflows:Cwww.hackshp.cn0C1C2IRRA-B-200+110+12110%BecausetheIRRfortheincrementalcashflowsexceedsthecostofcapital,theadditionalinvestmentinAisworthwhile.$250$300c.NPV=−$400++=$81.86A21.09(1.09)$140$179NPV=−$200++=$79.10B21.09(1.09)30khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.Useincrementalanalysis:C1C2C3Currentarrangement-250,000-250,000+650,000Extrashift-550,000+650,0000Incrementalflows-300,000+900,000-650,000TheIRRsfortheincrementalflowsare(approximately):21.13%and78.87%Ifthecostofcapitalisbetweentheserates,Titanicshouldworktheextrashift.20,000−10,000+1.108,1827.a.PI===0.82D−(−10,000)10,000khdaw.com35,000−20,000+1.1011,818PI===0.59E−(−20,000)20,000b.EachprojecthasaProfitabilityIndexgreaterthanzero,andsobothareacceptableprojects.Inordertochoosebetweentheseprojects,wemustuseincrementalanalysis.Fortheincrementalcashflows:15,000−10,000+1.103,636PI===0.36E−D−(−10,000)10,000课后答案网Theincrementisthusanacceptableproject,andsothelargerprojectshouldbeaccepted,i.e.,acceptProjectE.(Notethat,inthiscase,thebetterprojecthasthelowerprofitabilityindex.)www.hackshp.cn8.UsingthefactthatProfitabilityIndex=(NetPresentValue/Investment),wefind:ProjectProfitabilityIndex10.222-0.0230.1740.1450.0760.1870.12Thus,giventhebudgetof$1million,thebestthecompanycandoistoacceptProjects1,3,4,and6.IfthecompanyacceptedallpositiveNPVprojects,themarketvalue(comparedtothemarketvalueunderthebudgetlimitation)wouldincreasebytheNPVofProject5plustheNPVofProject7:$7,000+$48,000=$55,000Thus,thebudgetlimitcoststhecompany$55,000intermsofitsmarketvalue.31khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.TheIRRisthediscountratewhich,whenappliedtoaproject’scashflows,yieldsNPV=0.Thus,itdoesnotrepresentanopportunitycost.However,ifeachproject’scashflowscouldbeinvestedatthatproject’sIRR,thentheNPVofeachprojectwouldbezerobecausetheIRRwouldthenbetheopportunitycostofcapitalforeachproject.ThediscountrateusedinanNPVcalculationistheopportunitycostofcapital.Therefore,itistruethattheNPVruledoesassumethatcashflowsarereinvestedattheopportunitycostofcapital.2.a.khdaw.comC0=–3,000C0=–3,000C1=+3,500C1=+3,500C2=+4,000C2+PV(C3)=+4,000–3,571.43=428.57C3=–4,000MIRR=27.84%xCC23b.xC+=−121.121.122(1.12)(xC1)+(1.12)(xC2)=–C32(x)[(1.12)(C1)+(1.12C2)]=–C3-Cx=课后答案网32(1.12)(C)+(1.12C)124,000x==0.452(1.12www.hackshp.cn)(3,500)+(1.12)(4,000)(1-x)C(1-x)C12C++=002(1+IRR)(1+IRR)(1-0.45)(3,500)(1-0.45)(4,000)−3,000++=02(1+IRR)(1+IRR)Now,findMIRRusingeithertrialanderrorortheIRRfunction(onafinancialcalculatororExcel).WefindthatMIRR=23.53%.ItisnotclearthateitherofthesemodifiedIRRsisatallmeaningful.Rather,thesecalculationsseemtohighlightthefactthatMIRRreallyhasnoeconomicmeaning.32khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.Maximize:NPV=6,700xW+9,000xX+0XY–1,500xZsubjectto:10,000xW+0xX+10,000xY+15,000xZ≤20,00010,000xW+20,000xX–5,000xY–5,000xZ≤20,0000xW-5,000xX–5,000xY–4,000xZ≤20,0000≤xW≤10≤xX≤10≤xZ≤1UsingExcelSpreadsheetAdd-inLinearProgrammingModule:khdaw.comOptimizedNPV=$13,450withxW=1;xX=0.75;xY=1andxZ=0Iffinancingavailableatt=0is$21,000:OptimizedNPV=$13,500withxW=1;xX=(23/30);xY=1andxZ=(2/30)Here,theshadowpricefortheconstraintatt=0is$50,theincreaseinNPVfora$1,000increaseinfinancingavailableatt=0.Inthiscase,theprogramviewedxZasaviablechoiceeventhoughtheNPVofProjectZisnegative.ThereasonforthisresultisthatProjectZprovidesapositivecashflowinperiods1and2.课后答案网Ifthefinancingavailableatt=1is$21,000:OptimizedNPV=$13,900withxW=1;www.hackshp.cnxX=0.8;xY=1andxZ=0Hence,theshadowpriceofanadditional$1,000int=1financingis$450.33khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER6MakingInvestmentDecisionswithTheNetPresentValueRuleAnswerstoPracticeQuestions1.Seethetablebelow.Webeginwiththecashflowsgiveninthetext,Table6.6,line8,andutilizethefollowingrelationshipfromChapter3:tRealcashflow=nominalcashflow/(1+inflationrate)Here,thenominalrateis20percent,theexpectedinflationrateis10percent,khdaw.comandtherealrateisgivenbythefollowing:(1+rnominal)=(1+rreal)×(1+inflationrate)1.20=(1+rreal)×(1.10)rreal=0.0909=9.09%Ascanbeseeninthetable,theNPVisunchanged(towithinaroundingerror).Year0Year1Year2Year3Year4Year5Year6Year7NetCashFlows(Nominal)-12,600-1,4842,9476,32310,5349,9855,7573,269NetCashFlows(Real)-12,600-1,3492,4364,7517,1956,2003,2501,678NPVofRealCashFlows(at9.09%)=$3,804课后答案网2.No,thisisnotthecorrectprocedure.Theopportunitycostofthelandisitsvalueinitsbestuse,soMr.Northshouldconsiderthe$45,000valueofthelandasanoutlayinhisNPVanalysisofthefuneralhome.www.hackshp.cn3.Investmentinworkingcapitalarisesasaforecastingissueonlybecauseaccrualaccountingrecognizessaleswhenmade,notwhencashisreceived(andcostswhenincurred,notwhencashpaymentismade).Ifcashflowforecastsrecognizetheexacttimingofthecashflows,thenthereisnoneedtoalsoincludeinvestmentinworkingcapital.34khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.Ifthe$50,000isexpensedattheendofyear1,thevalueofthetaxshieldis:0.35×$50,000=$16,6671.05Ifthe$50,000expenditureiscapitalizedandthendepreciatedusingafive-yearMACRSdepreciationschedule,thevalueofthetaxshieldis:⎛0.200.320.1920.11520.11520.0576⎞[0.35×$50,000]×⎜+++++⎟=$15,30623456⎝1.051.051.051.051.051.05⎠Ifthecostcanbeexpensed,thenthetaxshieldislarger,sothattheafter-taxcostissmaller.khdaw.com5$26,0005.a.NPV=−$100,000+∑=$3,810Att=11.08NPVB=–Investment+PV(after-taxcashflow)+PV(depreciationtaxshield)5$26,000×(1−0.35)NPVB=−$100,000+∑t+t=11.08⎡0.200.320.1920.11520.11520.0576⎤[]0.35×$100,000×+++++⎢23456⎥⎣1.081.081.081.081.081.08⎦NPVB=–$4,127课后答案网Another,perhapsmoreintuitive,waytodotheCompanyBanalysisistofirstcalculatethecashflowsateachpointintime,andthencomputethepresentvalueofthesecashflows:t=0www.hackshp.cnt=1t=2t=3t=4t=5t=6Investment100,000CashInflow26,00026,00026,00026,00026,000Depreciation20,00032,00019,20011,52011,5205,760TaxableIncome6,000-6,0006,80014,48014,480-5,760Tax2,100-2,1002,3805,0685,068-2,016CashFlow-100,00023,90028,10023,62020,93220,9322,016NPV(at8%)=-$4,127b.IRRA=9.43%IRRB=6.39%0.0639Effectivetaxrate=1−=0.322=32.2%0.094335khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.a.TABLE6.5TaxpaymentsonIM&C’sguanoproject($thousands)No.ofyearsdepreciation7Taxrate(percent)35Period01234567MACRS%14.2924.4917.4912.498.938.920.00Taxdepreciation1,4292,4491,7491,2498938920(MACRS%xdepreciableinvestment)1.Sales052312,88732,61048,90135,83419,71702.Costofgoodssold08377,72919,55229,34521,49211,83003.Othercosts4,0002,2001,2101,3311,4641,6111,77204.khdaw.comTaxdepreciation01,4292,4491,7491,24989389205.Pretaxprofits-4,000-3,9431,4999,97816,84311,8385,2236106.Tax-1,400-1,3805253,4925,8954,1431,828214TABLE6.6IM&C’sguanoproject–revisedcashflowanalysiswithMACRSdepreciation($thousands)Period012345671.Sales052312,88732,61048,90135,83419,71702.Costofgoodssold08377,72919,55229,34521,49211,83003.Othercosts4,0002,2001,2101,3311,4641,6111,77204.Tax课后答案网-1,400-1,3805253,4925,8954,1431,8282145.Cashflowfromoperations-2,600-1,1343,4238,23512,1978,5884,287-2146.Changeinworkingcapital-550-739-1,972-1,6291,3071,5812,0027.Capitalinvestmentanddisposal-10,0000000001,9498.Netcashflow(5+6+7)-12,600-1,6842,6846,26310,5689,8955,8683,7379.Presentvaluewww.hackshp.cn-12,600-1,4031,8643,6245,0963,9771,9651,043Netpresentvalue=3,566Costofcapital(percent)2036khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.TABLE6.1IM&C’sguanoproject–projections($thousands)reflectinginflationandstraightlinedepreciationPeriod012345671.Capitalinvestment15,000-1,9492.Accumulateddepn.2,4174,8337,2509,66712,08314,50003.Year-endbookvalue15,00012,58310,1677,7505,3332,91750004.Workingcapital5501,2893,2614,8903,5832,00205.Totalbookvalue(3+4)13,13311,45611,01110,2236,5002,50206.Sales52312,88732,61048,90135,83419,7177.Costofgoodssold8377,72919,55229,34521,49211,8308.Othercosts4,0002,2001,2101,3311,4641,6111,7729.Depreciationkhdaw.com2,4172,4172,4172,4172,4172,417010.Pretaxprofit-4,000-4,9311,5319,31015,67510,3143,6981,44911.Tax-1,400-1,7265363,2595,4863,6101,29450712.Profitaftertax(10–11)-2,600-3,2059956,05210,1896,7042,404942Notes:No.ofyearsdepreciation6Assumedsalvagevalueindepreciationcalculation500Taxrate(percent)35TABLE6.2IM&C’sguanoproject–initialcashflowanalysiswithstraight-linedepreciation($thousands)课后答案网Period012345671Sales052312,88732,61048,90135,83419,71702Costofgoodssoldwww.hackshp.cn08377,72919,55229,34521,49211,83003Othercosts4,0002,2001,2101,3311,4641,6111,77204Tax-1,400-1,7265363,2595,4863,6101,2945075Cashflowfromoperations-2,600-7883,4128,46912,6069,1214,821-5076Changeinworkingcapital-550-739-1,972-1,6291,3071,5812,0027Capitalinvestmentanddisposal-15,0000000001,9498Netcashflow(5+6+7)-17,600-1,3382,6736,49710,97710,4286,4023,4449Presentvalue-17,600-1,2062,1704,7507,2316,1893,4231,659Netpresentvalue=6,615Costofcapital(percent)1137khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.TABLE6.1IM&C’sguanoproject–projections($thousands)reflectinginflationandstraightlinedepreciationPeriod012345671.Capitalinvestment15,000-1,9492.Accumulateddepn.2,4174,8337,2509,66712,08314,50003.Year-endbookvalue15,00012,58310,1677,7505,3332,91750004.Workingcapital6051,4183,5875,3793,9412,20205.Totalbookvalue(3+4)13,18811,58511,33710,7126,8582,70206.Sales57514,17635,87153,79139,41721,6897.Costofgoodssold9218,50221,50732,28023,64113,0138.Othercosts4,0002,2001,2101,3311,4641,6111,7729.Depreciationkhdaw.com2,4172,4172,4172,4172,4172,417010.Pretaxprofit-4,000-4,9622,04710,61617,63111,7484,4871,44911.Tax-1,400-1,7377163,7166,1714,1121,57050712.Profitaftertax(10–11)-2,600-3,2261,3306,90011,4607,6362,916942Notes:No.ofyearsdepreciation6Assumedsalvagevalueindepreciationcalculation500Taxrate(percent)35TABLE6.2IM&C’sguanoproject–initialcashflowanalysiswithstraight-linedepreciation($thousands)课后答案网Period012345671Sales057514,17635,87153,79139,41721,68902Costofgoodssoldwww.hackshp.cn09218,50221,50732,28023,64113,01303Othercosts4,0002,2001,2101,3311,4641,6111,77204Tax-1,400-1,7377163,7166,1714,1121,5705075Cashflowfromoperations-2,600-8093,7479,31713,87710,0535,333-5076Changeinworkingcapital-605-813-2,169-1,7921,4381,7392,2027Capitalinvestmentanddisposal-15,0000000001,9498Netcashflow(5+6+7)-17,600-1,4142,9357,14812,08511,4917,0723,6449Presentvalue-17,600-1,2732,3825,2277,9616,8193,7811,755Netpresentvalue=9,051Costofcapital(percent)1138khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 7.Assumethefollowing:a.Thefirmwillmanufacturewidgetsforatleast10years.b.Therewillbenoinflationortechnologicalchange.c.The15percentcostofcapitalisappropriateforallcashflowsandisareal,after-taxrateofreturn.d.Alloperatingcashflowsoccurattheendoftheyear.Note:Sincepurchasingthelidscanbeconsideredaone-year‘project,’thetwoprojectshaveacommonchainlifeof10years.ComputeNPVforeachprojectasfollows:10($2×200,000)×(1−0.35)NPV(purchase)=−∑=−$1,304,880tkhdaw.comt=11.1510($1.50×200,000)×(1−0.35)NPV(make)=−$150,000−$30,000−∑tt=11.15⎡0.14290.24490.17490.1249+[]0.35×$150,000×++++⎢1234⎣1.151.151.151.150.08930.08930.08930.0445⎤$30,000++++=−$1,118,3285678⎥101.151.151.151.15⎦1.15Thus,thewidgetmanufacturershouldmakethelids.8.a.CapitalExpenditure课后答案网1.Ifthesparewarehousespacewillbeusednoworinthefuture,thentheprojectshouldbecreditedwiththesebenefits.2.Chargeopportunitycostofthelandandbuilding.3.Thesalvagevalueattheendoftheprojectshouldbeincluded.www.hackshp.cnResearchandDevelopment1.Researchanddevelopmentisasunkcost.WorkingCapital1.Willadditionalinventoriesberequiredasvolumeincreases?2.Recoveryofinventoriesattheendoftheprojectshouldbeincluded.3.Isadditionalworkingcapitalrequiredduetochangesinreceivables,payables,etc.?Revenue1.Revenueforecastsassumeprices(andquantities)willbeunaffectedbycompetition,acommonandcriticalmistake.OperatingCosts1.Arepercentagelaborcostsunaffectedbyincreaseinvolumeintheearlyyears?2.Wagesgenerallyincreasefasterthaninflation.DoesReliableexpectcontinuingproductivitygainstooffsetthis?39khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Overhead1.Is“overhead”trulyincremental?Depreciation1.Depreciationisnotacashflow,buttheACRSdeprecationdoesaffecttaxpayments.2.ACRSdepreciationisfixedinnominalterms.Therealvalueofthedepreciationtaxshieldisreducedbyinflation.Interest1.Itisbadpracticetodeductinterestcharges(orotherpaymentstosecurityholders).Valuetheprojectasifitisallequity-financed.Tax1.SeecommentsonACRSdepreciationandinterest.2.IfReliablehasprofitsonitsremainingbusiness,thetaxlossshouldkhdaw.comnotbecarriedforward.NetCashFlow1.SeecommentsonACRSdepreciationandinterest.2.Discountrateshouldreflectprojectcharacteristics;ingeneral,itisnotequivalenttothecompany’sborrowingrate.b.1.Potentialuseofwarehouse.2Opportunitycostofbuilding.3.Otherworkingcapitalitems.4.Morerealisticforecastsofrevenuesandcosts.5.Company’sabilitytousetaxshields.6.Opportunitycostofcapital.课后答案网c.ThetableonthenextpageshowsasampleNPVanalysisfortheproject.Theanalysisisbasedonthefollowingassumptions:1.Inflation:10percentperyear.2.CapitalExpenditure:www.hackshp.cn$8millionformachinery;$5millionformarketvalueoffactory;$2.4millionforwarehouseextension(weassumethatitiseventuallyneededorthatelectricmotorprojectandsurpluscapacitycannotbeusedintheinterim).Weassumesalvagevalueof$3millioninrealtermslesstaxat35percent.3.WorkingCapital:Weassumeinventoryinyeartis9.1percentofexpectedrevenuesinyear(t+1).Wealsoassumethatreceivableslesspayables,inyeart,isequalto5percentofrevenuesinyeart.4.DepreciationTaxShield:Basedon35percenttaxrateand5-yearACRSclass.Thisisasimplifyingandprobablyinaccurateassumption;i.e.,notalltheinvestmentwouldfallinthe5-yearclass.Also,thefactoryiscurrentlyownedbythecompanyandmayalreadybepartiallydepreciated.Weassumethecompanycanusetaxshieldsastheyarise.40khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.Revenues:Salesof2,000motorsin2004,4,000motorsin2005,and10,000motorsthereafter.Theunitpriceisassumedtodeclinefrom$4,000(real)to$2,850whencompetitionentersin2006.Thelatteristhefigureatwhichnewentrants’investmentintheprojectwouldhaveNPV=0.6.OperatingCosts:Weassumedirectlaborcostsdeclineprogressivelyfrom$2,500perunitin2004,to$2,250in2005andto$2,000inrealtermsin2006andafter.7.OtherCosts:Weassumetrueincrementalcostsare10percentofrevenue.8.Tax:35percentofrevenuelesscosts.9.OpportunityCostofCapital:Assumed20percent.khdaw.com200320042005200620072008CapitalExpenditure-15,400ChangesinWorkingCapitalInventories-801-961-1,690-345380-418Receivables–Payables-440-528-929-190-209DepreciationTaxShield1,0781,7251,035621621Revenues8,80019,36037,93441,72745,900OperatingCosts-5,500-10,890-26,620-29,282-32,210Othercosts-880-1,936-3,793-4,173-4,590Tax课后答案网-847-2,287-2,632-2,895-3,185NetCashFlow-16,2011,2503,7544,6505,4285,909200920102011201220132014CapitalExpenditurewww.hackshp.cn5,058ChangesinWorkingCapitalInventories-459-505-556-6126,727Receivables–Payables-229-252-278-306-3363,696DepreciationTaxShield310Revenues50,48955,53861,09267,20273,922OperatingCosts-35,431-38,974-42,872-47,159-51,875Othercosts-5,049-5,554-6,109-6,720-7,392Tax-3,503-3,854-4,239-4,663-5,129NetCashFlow6,1286,3997,0387,74220,9753,696NPV(at20%)=$5,99141khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.Thetablebelowshowstherealcashflows.TheNPViscomputedusingtherealrate,whichiscomputedasfollows:(1+rnominal)=(1+rreal)×(1+inflationrate)1.09=(1+rreal)×(1.03)rreal=0.0583=5.83%t=0t=1t=2t=3t=4t=5t=6t=7t=8Investment-35,000.015,000.0Savings7,410.07,410.07,410.07,410.07,410.07,410.07,410.07,410.0Insurance-1,200.0-1,200.0-1,200.0-1,200.0-1,200.0-1,200.0-1,200.0-1,200.0Fuel-526.5-526.5-526.5-526.5-526.5-526.5-526.5-526.5NetCashFlow-35,000.05,683.55,683.55,683.55,683.55,683.55,683.55,683.520,683.5NPV(at5.83%)=$10,064.9khdaw.com10.t=0t=1t=2t=3t=4t=5t=6t=7t=8Sales4,200.04,410.04,630.54,862.05,105.15,360.45,628.45,909.8ManufacturingCosts3,780.03,969.04,167.54,375.84,594.64,824.45,065.65,318.8Depreciation120.0120.0120.0120.0120.0120.0120.0120.0Rent100.0104.0108.2112.5117.0121.7126.5131.6EarningsBeforeTaxes200.0217.0234.8253.7273.5294.3316.3339.4Taxes70.076.082.288.895.7103.0110.7118.8CashFlow-Operations250.0261.1272.6284.9297.8311.3325.6340.6WorkingCapital350.0420.0441.0463.1486.2510.5536.0562.80.0IncreaseinW.C.350.070.021.022.123.124.325.526.8-562.8InitialInvestment1,200.0课后答案网SaleofPlant400.0TaxonSale56.0NetCashFlow-1,550.0180.0240.1250.5261.8273.5285.8298.81,247.4NPV(at12%)=$85.7www.hackshp.cn11.[Note:Section6.2providesseveraldifferentcalculationsofpre-taxprofitandtaxes,basedondifferentassumptions;thesolutionbelowisbasedonTable6.6inthetext.]Seethetablebelow.Withfullusageofthetaxlosses,theNPVofthetaxpaymentsis$4,779.Withtaxlossescarriedforward,theNPVofthetaxpaymentsis$5,741.Thus,withtaxlossescarriedforward,theproject’sNPVdecreasesby$962,sothatthevaluetothecompanyofusingthedeductionsimmediatelyis$962.42khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com t=0t=1t=2t=3t=4t=5t=6t=7PretaxProfit-4,000-4,5147489,80716,94011,5795,5391,949Fullusageoftaxlossesimmediately(Table6.6)-1,400-1,5802623,4325,9294,0531,939682NPV(at20%)=$4,779Taxlosscarry-forward0007145,9294,0531,939682NPV(at20%)=$5,74112.(Note:RownumbersinthetablebelowrefertotherowsinTable6.8.)t=0t=1t=2t=3t=4t=5t=6t=7t=81.Capitalinvestment83.5-12.04.Workingkhdaw.comcapital2.34.47.66.95.33.22.50.00.0ChangeinW.C.2.32.13.2-0.7-1.6-2.1-0.7-2.50.09.Depreciation11.911.911.911.911.911.911.90.012.Profitaftertax-6.24.226.923.515.45.01.6-7.8CashFlow-85.83.612.939.537.029.417.616.04.2NPV(at11.0%)=$17.5513.Inordertosolvethisproblem,wecalculatetheequivalentannualcostforeachofthetwoalternatives.(Allcashflowsareinthousands.)Alternative1–Sellthenewmachine:Ifwesellthenewmachine,wereceivethecashflowfromthesale,paytaxesonthegain,andpaythecostsassociatedwithkeepingtheoldmachine.Thepresentvalueofthisalternativeis:课后答案网3030303030PV=50−[0.35(50−0)]−20−−−−−123451.121.121.121.121.125www.hackshp.cn0.35(5−0)+−=−$93.80551.121.12Theequivalentannualcostforthefive-yearperiodiscomputedasfollows:PV1=EAC1×[annuityfactor,5timeperiods,12%]–93.80=EAC1×[3.605]EAC1=–26.02,oranequivalentannualcostof$26,02043khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Alternative2–Selltheoldmachine:Ifweselltheoldmachine,wereceivethecashflowfromthesale,paytaxesonthegain,andpaythecostsassociatedwithkeepingthenewmachine.Thepresentvalueofthisalternativeis:2020202020PV=25−[0.35(25−0)]−−−−−223451.121.121.121.121.12203030303030−−−−−−56789101.121.121.121.121.121.1250.35(5−0)+−=−$127.5110101.121.12Theequivalentannualcostfortheten-yearperiodiscomputedasfollows:PVkhdaw.com2=EAC2×[annuityfactor,10timeperiods,12%]–127.51=EAC2×[5.650]EAC2=–22.57,oranequivalentannualcostof$22,570Thus,theleastexpensivealternativeistoselltheoldmachinebecausethisalternativehasthelowestequivalentannualcost.Onekeyassumptionunderlyingthisresultisthat,wheneverthemachineshavetobereplaced,thereplacementwillbeamachinethatisasefficienttooperateasthenewmachinebeingreplaced.14.Thecurrentcopiershavenetcostcashflowsasfollows:课后答案网Before-TaxNetCashYearCashFlowAfter-TaxCashFlowFlow1-2,000www.hackshp.cn(-2,000×.65)+(.35×.0893×20,000)-674.92-2,000(-2,000×.65)+(.35×.0893×20,000)-674.93-8,000(-8,000×.65)+(.35×.0893×20,000)-4,574.94-8,000(-8,000×.65)+(.35×.0445×20,000)-4,888.55-8,000(-8,000×.65)-5,200.06-8,000(-8,000×.65)-5,200.0Thesecashflowshaveapresentvalue,discountedat7percent,of–$15,857.Usingtheannuityfactorfor6timeperiodsat7percent(4.767),wefindanequivalentannualcostof$3,327.Therefore,thecopiersshouldbereplacedonlywhentheequivalentannualcostofthereplacementsislessthan$3,327.44khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Whenpurchased,thenewcopierswillhavenetcostcashflowsasfollows:Before-TaxNetCashYearCashFlowAfter-TaxCashFlowFlow0-25,000-25,000-25,000.01-1,000(-1,000×.65)+(.35×.1429×25,000)600.42-1,000(-1,000×.65)+(.35×.2449×25,000)1,492.93-1,000(-1,000×.65)+(.35×.1749×25,000)880.44-1,000(-1,000×.65)+(.35×.1249×25,000)442.95-1,000(-1,000×.65)+(.35×.0893×25,000)131.46-1,000(-1,000×.65)+(.35×.0893×25,000)131.47-1,000(-1,000×.65)+(.35×.0893×25,000)131.4khdaw.com8-1,000(-1,000×.65)+(.35×.0445×25,000)-260.6Thesecashflowshaveapresentvalue,discountedat7percent,of–$21,967.Thedecisiontoreplacemustalsotakeintoaccounttheresalevalueofthemachine,aswellastheassociatedtaxontheresultinggain(orloss).Considerthreecases:a.Thebook(depreciated)valueoftheexistingcopiersisnow$6,248.Iftheexistingcopiersarereplacednow,thenthepresentvalueofthecashflowsis:–21,967+8,000–[0.35×(8,000–6,248)]=–$14,580Usingtheannuityfactorfor8timeperiodsat7percent(5.971),wefindthattheequivalentannualcostis$2,442.课后答案网b.Twoyearsfromnow,thebook(depreciated)valueoftheexistingcopierswillbe$2,676.Iftheexistingcopiersarereplacedtwoyearsfromnow,thenthepresentvalueofthecashflowsis:(–674.9/1.07www.hackshp.cn1)+(–674.9/1.072)+(–21,967/1.072)+2{3,500–[0.35×(3,500–2,676)]}/1.07=–$17,602Usingtheannuityfactorfor10timeperiodsat7percent(7.024),wefindthattheequivalentannualcostis$2,506.c.Sixyearsfromnow,boththebookvalueandtheresalevalueoftheexistingcopierswillbezero.Iftheexistingcopiersarereplacedsixyearsfromnow,thenthepresentvalueofthecashflowsis:6–15,857+(–21,967/1.07)=–$30,495Usingtheannuityfactorfor14timeperiodsat7percent(8.745),wefindthattheequivalentannualcostis$3,487.Thecopiersshouldbereplacedimmediately.45khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 15.a.Year1Year2Year3Year4Year5Year6Year7Year8Year9Year10Year11MACRS10.00%18.00%14.40%11.52%9.22%7.37%6.55%6.55%6.55%6.55%3.29%PercentMACRS40.0072.0057.6046.0836.8829.4826.2026.2026.2026.2013.16Depr.Tax15.6028.0822.4617.9714.3811.5010.2210.2210.2210.225.13ShieldPresentValue(at7%)=$114.57millionTheequivalentannualcostofthedepreciationtaxshieldiscomputedbydividingthepresentvalueofthetaxshieldbytheannuityfactorfor25yearsat7%:khdaw.comEquivalentannualcost=$114.57million/11.654=$9.83millionTheequivalentannualcostofthecapitalinvestmentis:$34.3million–$9.83million=$24.47millionb.Theextracostpergallon(aftertax)is:$24.47million/900milliongallons=$0.0272pergallonThepre-taxcharge=$0.0272/0.65=$0.0418pergallon16.Sincethegrowthinvalueof课后答案网bothtimberandlandislessthanthecostofcapitalafteryear8,itmustpaytocutbythattime.ThetablebelowshowsthatPVismaximizedifyoucutinyear8.Therefore,ifwecutinyear8,theNPVoftheofferis:$140,000–$109,900=$30,100www.hackshp.cnYear1Year2Year3Year4Year5FutureValue:Timber48.358.270.284.797.8Land52.054.156.258.560.8Total100.3112.3126.4143.2158.6PresentValue:92.094.597.6101.4103.1Year6Year7Year8Year9FutureValue:Timber112.9130.3150.5162.7Land63.365.868.471.2Total176.2196.1218.9233.9PresentValue:105.1107.3109.9107.746khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10,00010,00010,00017.a.PV=40,000+++A231.061.061.06PVA=$66,730(Notethatthisisacost.)8,0008,0008,0008,000PV=50,000++++B2341.061.061.061.06PVB=$77,721(Notethatthisisacost.)Equivalentannualcost(EAC)isfoundby:PVA=EACA×[annuityfactor,6%,3timeperiods]khdaw.com66,730=EACA×2.673EACA=$24,964peryearrentalPVB=EACB×[annuityfactor,6%,4timeperiods]77,721=EACB×3.465EACB=$22,430peryearrentalb.Annualrentalis$24,964forMachineAand$22,430forMachineB.BorstalshouldbuyMachineB.c.Thepaymentswouldincreaseby8percentperyear.Forexample,forMachineA,rentforthefirstyearwouldbe$24,964;rentforthesecond课后答案网yearwouldbe($24,964×1.08)=$26,961;etc.18.Becausethecostofanewmachinenowdecreasesby10percentperyear,thewww.hackshp.cnrentonsuchamachinealsodecreasesby10percentperyear.Therefore:9,0008,1007,290PV=40,000+++A231.061.061.06PVA=$61,820(Notethatthisisacost.)7,2006,4805,8325,249PV=50,000++++B2341.061.061.061.06PVB=$71,614(Notethatthisisacost.)47khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Equivalentannualcost(EAC)isfoundasfollows:PVA=EACA×[annuityfactor,6%,3timeperiods]61,820=EACA×2.673EACA=$23,128,areductionof7.35%PVB=EACB×[annuityfactor,6%,4timeperiods]71,614=EACB×3.465EACB=$20,668,areductionof7.86%19.khdaw.comWitha6-yearlife,theequivalentannualcost(at8percent)ofanewjetis:$1,100,000/4.623=$237,941Ifthejetisreplacedattheendofyear3ratherthanyear4,thecompanywillincuranincrementalcostof$237,941inyear4.Thepresentvalueofthiscostis:4$237,941/1.08=$174,894380,000Thepresentvalueofthesavingsis:∑t=$206,168t=11.08Thepresidentshouldallowwideruseofthepresentjetbecausethepresentvalueofthesavingsisgreaterthanthepresentvalueofthecost.课后答案网www.hackshp.cn48khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Year0Year1Year2Year3Year4Year5Year6Year7Pre-TaxFlows-14,000-3,0643,2099,75516,46314,0387,6963,951IRR=33.5%Post-TaxFlows-12,600-1,6302,3816,20510,68510,1366,1103,444IRR=26.8%EffectiveTaxRate=20.0%b.Ifthedepreciationrateisaccelerated,thishasnoeffectonthepretaxIRR,butitincreasestheafter-taxIRR.Therefore,thenumeratordecreaseskhdaw.comandtheeffectivetaxratedecreases.Iftheinflationrateincreases,wewouldexpectpretaxcashflowstoincreaseattheinflationrate,whileafter-taxcashflowsincreaseataslowerrate.After-taxcashflowsincreaseataslowerratethantheinflationratebecausedepreciationexpensedoesnotincreasewithinflation.Therefore,thenumeratorofTEbecomesproportionatelylargerthanthedenominatorandtheeffectivetaxrateincreases.CC(1−T)C−I(1−TC)I(1−TC)⎡CC⎤⎡I(1−TC)⎤c.T==−=1−(1−T)=TEC⎢⎥⎢⎥CC课后答案网⎣I(1−TC)I⎦⎣C⎦I(1−T)CHence,iftheup-frontinvestmentisdeductiblefortaxpurposes,thentheeffectivetaxrateisequaltothestatutorytaxrate.www.hackshp.cn2.a.Witharealrateof6percentandaninflationrateof5percent,thenominalrate,r,isdeterminedasfollows:(1+r)=(1+0.06)×(1+0.05)r=0.113=11.3%Forathree-yearannuityat11.3%,theannuityfactoris:2.4310Foratwo-yearannuity,theannuityfactoris:1.7057Forathree-yearannuitywithapresentvalueof$28.37,thenominalannuityis:($28.37/2.4310)=$11.67Foratwo-yearannuitywithapresentvalueof$21.00,thenominalannuityis:($21.00/1.7057)=$12.31Thesenominalannuitiesarenotrealisticestimatesofequivalentannualcostsbecausetheappropriaterentalcost(i.e.,theequivalentannualcost)musttakeintoaccounttheeffectsofinflation.49khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Witharealrateof6percentandaninflationrateof25percent,thenominalrate,r,isdeterminedasfollows:(1+r)=(1+0.06)×(1+0.25)r=0.325=32.5%Forathree-yearannuityat32.5%,theannuityfactoris:1.7542Foratwo-yearannuity,theannuityfactoris:1.3243Forathree-yearannuitywithapresentvalueof$28.37,thenominalannuityis:($28.37/1.7542)=$16.17Foratwo-yearannuitywithapresentvalueof$21.00,thenominalannuityis:($21.00/1.3243)=$15.86khdaw.comWithaninflationrateof5percent,MachineAhasthelowernominalannualcost($11.67comparedto$12.31).Withinflationat25percent,MachineBhasthelowernominalannualcost($15.86comparedto$16.17).Thusitisclearthatinflationhasasignificantimpactonthecalculationofequivalentannualcost,andhence,thewarninginthetexttodothesecalculationsinrealterms.Therankingschangebecause,atthehigherinflationrate,themachinewiththelongerlife(here,MachineA)isaffectedmore.课后答案网www.hackshp.cn50khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER7IntroductiontoRisk,Return,andTheOpportunityCostofCapitalAnswerstoPracticeQuestions1.RecallfromChapter3that:(1+rnominal)=(1+rreal)×(1+inflationrate)Therefore:rreal=[(1+rnominal)/(1+inflationrate)]–1khdaw.coma.Therealreturnonthestockmarketineachyearwas:1999:20.4%2000:-13.8%2001:-12.4%2002:-22.82003:29.1%b.FromtheresultsforPart(a),theaveragerealreturnwas:0.10%c.Theriskpremiumforeachyearwas:1999:18.9%课后答案网2000:-16.8%2001:-14.8%2002:-22.6%2003:30.6%www.hackshp.cnd.FromtheresultsforPart(c),theaverageriskpremiumwas:–0.94%e.Thestandarddeviation(σ)oftheriskpremiumiscalculatedasfollows:2⎛1⎞222σ=⎜⎟×[(0.189−(−0.0094))+(−0.168−(−0.0094))+(−0.148−(−0.0094))⎜⎟⎝5−1⎠22+(−0.226−(−0.0094))+(0.306−(−0.0094))]=0.057530σ=0.057530=0.2399=23.99%2.Internetexercise;answerswillvary.51khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.a.Along-termUnitedStatesgovernmentbondisalwaysabsolutelysafeintermsofthedollarsreceived.However,thepriceofthebondfluctuatesasinterestrateschangeandtherateatwhichcouponpaymentsreceivedcanbeinvestedalsochangesasinterestrateschange.And,ofcourse,thepaymentsareallinnominaldollars,soinflationriskmustalsobeconsidered.b.Itistruethatstocksofferhigherlong-runratesofreturnthandobonds,butitisalsotruethatstockshaveahigherstandarddeviationofreturn.So,whichinvestmentispreferabledependsontheamountofriskoneiswillingtotolerate.Thisisacomplicatedissueanddependsonnumerousfactors,oneofwhichistheinvestmenttimehorizon.Iftheinvestorhasashorttimehorizon,thenstocksaregenerallynotpreferred.khdaw.comc.Unfortunately,10yearsisnotgenerallyconsideredasufficientamountoftimeforestimatingaverageratesofreturn.Thus,usinga10-yearaverageislikelytobemisleading.4.TherisktoHippiqueshareholdersdependsonthemarketrisk,orbeta,oftheinvestmentintheblackstallion.Theinformationgivenintheproblemsuggeststhatthehorsehasveryhighuniquerisk,butwehavenoinformationregardingthehorse’smarketrisk.So,thebestestimateisthatthishorsehasamarketriskaboutequaltothatofotherracehorses,andthusthisinvestmentisnotaparticularlyriskyoneforHippiqueshareholders.课后答案网5.Inthecontextofawell-diversifiedportfolio,theonlyriskcharacteristicofasinglesecuritythatmattersisthesecurity’scontributiontotheoverallportfoliorisk.Thiswww.hackshp.cncontributionismeasuredbybeta.LonesomeGulchisthesaferinvestmentforadiversifiedinvestorbecauseitsbeta(+0.10)islowerthanthebetaofAmalgamatedCopper(+0.66).Foradiversifiedinvestor,thestandarddeviationsareirrelevant.6.xI=0.60σI=0.10xJ=0.40σJ=0.20a.ρ=1IJ22222σ=x[σ+xσ+2(xxρσσ)]pIIJJIJIJIJ2222=[(0.60)(0.10)+(0.40)(0.20)+2(0.60)(0.40)(1)(0.10)(0.20)]=0.019652khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.ρ=0.50IJ22222σ=x[σ+xσ+2(xxρσσ)]pIIJJIJIJIJ2222=[(0.60)(0.10)+(0.40)(0.20)+2(0.60)(0.40)(0.50)(0.10)(0.20])=0.0148c.ρ=0ij22222σ=x[σ+xσ+2(xxρσσ)]pIIJJIJIJIJ2222=[(0.60)(0.10)+(0.40)(0.20)+2(0.60)(0.40)(0)(0.10)(0.20)]=0.01007.khdaw.coma.RefertoFigure7.11inthetext.With100securities,theboxis100by100.Thevariancetermsarethediagonalterms,andthusthereare100varianceterms.Therestarethecovarianceterms.Becausetheboxhas(100times100)termsaltogether,thenumberofcovariancetermsis:2100–100=9,900Halfoftheseterms(i.e.,4,950)aredifferent.b.Onceagain,itiseasiesttothinkofthisintermsofFigure7.11.With50stocks,allwiththesamestandarddeviation(0.30),thesameweightintheportfolio(0.02),andallpairshavingthesamecorrelationcoefficient(0.40),theportfoliovarianceis:课后答案网222222σ=50(0.02)(0.30)+[(50)–50](0.02)(0.40)(0.30)=0.03708σ=0.193=19.3%c.Forafullydiversifiedportfolio,portfoliovarianceequalstheaveragewww.hackshp.cncovariance:2σ=(0.30)(0.30)(0.40)=0.036σ=0.190=19.0%8.a.RefertoFigure7.11inthetext.Foreachdifferentportfolio,therelativeweightofeachshareis[onedividedbythenumberofshares(n)intheportfolio],thestandarddeviationofeachshareis0.40,andthecorrelationbetweenpairsis0.30.Thus,foreachportfolio,thediagonaltermsarethesame,andtheoff-diagonaltermsarethesame.Therearendiagonal2termsand(n–n)off-diagonalterms.Ingeneral,wehave:2222Variance=n(1/n)(0.4)+(n–n)(1/n)(0.3)(0.4)(0.4)53khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 22Foroneshare:Variance=1(1)(0.4)+0=0.160000Fortwoshares:222Variance=2(0.5)(0.4)+2(0.5)(0.3)(0.4)(0.4)=0.104000Theresultsaresummarizedinthesecondandthirdcolumnsofthetablebelow.b.(Graphsareonthenextpage.)Theunderlyingmarketriskthatcannotbediversifiedawayisthesecondtermintheformulaforvarianceabove:22Underlyingmarketrisk=(n-n)(1/n)(0.3)(0.4)(0.4)22Asnincreases,[(n-n)(1/n)]=[(n-1)/n]becomescloseto1,sothatthekhdaw.comunderlyingmarketriskis:[(0.3)(0.4)(0.4)]=0.048c.ThisisthesameasPart(a),exceptthatalloftheoff-diagonaltermsarenowequaltozero.Theresultsaresummarizedinthefourthandfifthcolumnsofthetablebelow.(Parta)(Parta)(Partc)(Partc)No.ofStandardStandardSharesVarianceDeviationVarianceDeviation1.160000.400.160000.4002.104000.322.080000.2833.085333.292.053333.2314.076000.276.040000.200课后答案网5.070400.265.032000.1796.066667.258.026667.1637.064000.253.022857.1518.062000.249.020000.1419.060444.246.017778.133www.hackshp.cn10.059200.243.016000.12654khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com GraphsforPart(a):PortfolioVariancePortfolioStandardDeviation0.20.50.40.150.30.10.2Variance0.050.1StandardDeviation00024681012024681012NumberofSecuritiesNumberofSecuritiesGraphsforPart(c):khdaw.comPortfolioVariancePortfolioStandardDeviation0.20.50.40.150.30.10.2Variance0.050.1StandardDeviation00024681012024681012NumberofSecuritiesNumberofSecurities课后答案网www.hackshp.cn55khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.Internetexercise;answerswillvarydependingontimeperiod.10.ThetablebelowusestheformatofTable7.11inthetextinordertocalculatetheportfoliovariance.Theportfoliovarianceisthesumofalltheentriesinthematrix.Portfoliovarianceequals:0.0598355AlcanBPDeutscheKLMLVMHNestleSonyAlcan0.00186130.00057450.00129150.00181380.00157900.00024840.0010539BP0.00057450.00116570.00042740.00077090.00045070.00022680.0003244Deutsche0.00129150.00042740.00296250.00152560.00156750.00019280.0014404KLM0.00181380.00077090.00152560.00606170.00228900.00055170.0010038LVMH0.00157900.00045070.00156750.00228900.00360000.00002660.0020357Nestle0.00024840.00022680.00019280.00055170.00002660.00049030.0001503Sony0.00105390.00032440.00144040.00100380.00203570.00015030.0046046khdaw.com11.Internetexercise;answerswillvarydependingontimeperiod.12.“Safest”meanslowestrisk;inaportfoliocontext,thismeanslowestvarianceofreturn.HalfoftheportfolioisinvestedinAlcanstock,andhalfoftheportfoliomustbeinvestedinoneoftheothersecuritieslisted.Thus,wecalculatetheportfoliovarianceforsixdifferentportfoliostoseewhichisthelowest.ThesafestattainableportfolioiscomprisedofAlcanandNestle.StocksPortfolioVarianceAlcan&BP0.051156Alcan&Deutsche课后答案网0.090733Alcan&KLM0.141497Alcan&LVMH0.105587Alcan&Nestle0.034893Alcan&Sonywww.hackshp.cn0.10502813.a.Ingeneral,weexpectastock’spricetochangebyanamountequalto(beta×changeinthemarket).Betaequalto–0.25impliesthat,ifthemarketrisesbyanextra5percent,theexpectedchangeinthestock’srateofreturnis–1.25percent.Ifthemarketdeclinesanextra5percent,thentheexpectedchangeis+1.25percent.b.“Safest”implieslowestrisk.Assumingthewell-diversifiedportfolioisinvestedintypicalsecurities,theportfoliobetaisapproximatelyone.Thelargestreductioninbetaisachievedbyinvestingthe$20,000inastockwithanegativebeta.Answer(iii)iscorrect.14.Internetexercise;answerswillvarydependingontimeperiod.15.Internetexercise;answerswillvarydependingontimeperiod.56khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Ingeneral:22222Portfoliovariance=σP=x1σ1+x2σ2+2x1x2ρ12σ1σ2Thus:22222σP=(0.5)(0.530)+(0.5)(0.475)+2(0.5)(0.5)(0.72)(0.530)(0.475)2σP=0.21726Standarddeviation=σP=0.466=46.6%khdaw.comb.WecanthinkofthisintermsofFigure7.11inthetext,withthreesecurities.Oneofthesesecurities,T-bills,haszeroriskand,hence,zerostandarddeviation.Thus:22222σP=(1/3)(0.530)+(1/3)(0.475)+2(1/3)(1/3)(0.72)(0.530)(0.475)2σP=0.09656Standarddeviation=σP=0.311=31.1%Anotherwaytothinkofthisportfolioisthatitiscomprisedofone-thirdT-Billsandtwo-thirdsaportfoliowhichishalfDellandhalfMicrosoft.BecausetheriskofT-billsiszero,theportfoliostandarddeviationistwo-thirdsofthestandarddeviationcomputedinPart(a)above:课后答案网Standarddeviation=(2/3)(0.466)=0.311=31.1%c.With50percentmargin,theinvestorinveststwiceasmuchmoneyintheportfolioashehadtobeginwith.Thus,theriskistwicethatfoundinPartwww.hackshp.cn(a)whentheinvestorisinvestingonlyhisownmoney:Standarddeviation=2×46.6%=93.2%d.With100stocks,theportfolioiswelldiversified,andhencetheportfoliostandarddeviationdependsalmostentirelyontheaveragecovarianceofthesecuritiesintheportfolio(measuredbybeta)andonthestandarddeviationofthemarketportfolio.Thus,foraportfoliomadeupof100stocks,eachwithbeta=1.77,theportfoliostandarddeviationisapproximately:(1.77×15%)=26.55%.ForstockslikeMicrosoft,itis:(1.70×15%)=25.50%.57khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 2.Foratwo-securityportfolio,theformulaforportfolioriskis:2222Portfoliovariance=x1σ1+x2σ2+2x1x2ρρ12σ1σ2IfsecurityoneisTreasurybillsandsecuritytwoisthemarketportfolio,thenσ1iszero,σ2is20percent.Therefore:2222Portfoliovariance=x2σ2=x2(0.20)Standarddeviation=0.20x2Portfolioexpectedreturn=x1(0.06)+x2(0.06+0.85)Portfolioexpectedreturn=0.06x1+0.145x2ExpectedStandardkhdaw.comPortfolioX1X2ReturnDeviation11.00.00.0600.00020.80.20.0770.04030.60.40.0940.08040.40.60.1110.12050.20.80.1280.16060.01.00.1450.200PortfolioReturn&RiskPortfolioReturn&Risk课后答案网0.2www.hackshp.cnn0.15nn0.1nnnExpectedReturn0.05000.050.10.150.20.25StandardDeviation58khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.Internetexercise;answerswillvary.4.Thematrixbelowdisplaysthevarianceforeachofthesevenstocksalongthediagonalandeachofthecovariancesintheoff-diagonalcells:AlcanBPDeutscheKLMLVMHNestleSonyAlcan0.09120400.02814940.06328410.08887860.07737240.01217060.0516420BP0.02814940.05712100.02094360.03777400.02208360.01111350.0158935Deutsche0.06328410.02094360.14516100.07475220.07680960.00944880.0705803KLM0.08887860.03777400.07475220.29702500.11216100.02703200.0491863LVMH0.07737240.02208360.07680960.11216100.17640000.00130200.0997500Nestle0.01217060.01111350.00944880.02703200.00130200.02402500.0073625Sony0.05164200.01589350.07058030.04918630.09975000.00736250.2256250khdaw.comThecovarianceofAlcanwiththemarketportfolio(σAlcan,Market)isthemeanofthesevenrespectivecovariancesbetweenAlcanandeachofthesevenstocksintheportfolio.(ThecovarianceofAlcanwithitselfisthevarianceofAlcan.)Therefore,σAlcan,Marketisequaltotheaverageofthesevencovariancesinthefirstrowor,equivalently,theaverageofthesevencovariancesinthefirstcolumn.BetaforAlcanisequaltothecovariancedividedbythemarketvariance(seePracticeQuestion10).Thecovariancesandbetasaredisplayedinthetablebelow:CovarianceBetaAlcan0.05895730.9853BP0.02758260.4610Deutsche0.06585421.1006KLM0.09811561.6398LVMH0.08083981.3510课后答案网Nestle0.01320780.2207Sony0.07429141.2416www.hackshp.cn59khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER8RiskandReturnAnswerstoPracticeQuestions1.a.False–investorsdemandhigherexpectedratesofreturnonstockswithmorenondiversifiablerisk.b.False–asecuritywithabetaofzerowilloffertherisk-freerateofreturn.c.False–thebetawillbe:(1/3×0)+(2/3×1)=0.67d.True.khdaw.come.True.2.Inthefollowingsolution,securityoneisExxonMobilandsecuritytwoisCoca-Cola.Then:r1=0.10σ1=0.182r2=0.15σ2=0.273Further,weknowthatforatwo-securityportfolio:rp=x1r1+x2r222222σp=x1σ1课后答案网+2x1x2σ1σ2ρ12+x2σ2Therefore,wehavethefollowingresults:σpσpσpx1x2rpwww.hackshp.cnwhenρ=0whenρ=1whenρ=-11.00.00.1000.1820.1820.1820.90.10.1050.1660.1910.1370.80.20.1100.1560.2000.0910.70.30.1150.1510.2090.0460.60.40.1200.1540.2180.0000.50.50.1250.1640.2280.0460.40.60.1300.1790.2370.0910.30.70.1350.1990.2460.1370.20.80.1400.2210.2550.1820.10.90.1450.2460.2640.2280.01.00.1500.2730.2730.27360khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Correlation=016.00%14.00%12.00%10.00%8.00%6.00%ExpectedReturn4.00%2.00%0.00%khdaw.com0.00%10.00%20.00%30.00%StandardDeviationCorrelation=116.00%14.00%12.00%10.00%8.00%6.00%课后答案网4.00%ExpectedReturn2.00%0.00%0.00%10.00%www.hackshp.cn20.00%30.00%StandardDeviation61khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Correlation=-116.00%14.00%12.00%10.00%8.00%6.00%4.00%ExpectedReturn2.00%0.00%khdaw.com0.00%10.00%20.00%30.00%StandardDeviation3.a.Portfoliorσ110.0%5.1%29.04.6311.06.4b.Seethefigurebelow.Thesetofportfoliosisrepresentedbythecurved课后答案网line.ThefivepointsarethethreeportfoliosfromPart(a)plusthefollowingtwoportfolios:oneconsistsof100%investedinXandtheotherconsistsof100%investedinY.c.Seethefigurebelow.Thebestopportunitiesliealongthestraightline.www.hackshp.cnFromthediagram,theoptimalportfolioofriskyassetsisportfolio1,andsoMr.Harrywitzshouldinvest50percentinXand50percentinY.62khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 0.15ExpectedReturngg0.1ggg0.05khdaw.com000.020.040.060.080.1StandardDeviation4.a.Expectedreturn=(0.6×15)+(0.4×20)=17%2222Variance=(0.6×20)+(0.4×22)+2(0.6)(0.4)(0.5)(20)(22)=327.04(1/2)Standarddeviation=327.04=18.08%b.Correlationcoefficient=0课后答案网⇒Standarddeviation=14.88%Correlationcoefficient=–0.5⇒Standarddeviation=10.76%c.Hisportfolioisbetter.Theportfoliohasahigherexpectedreturnandalowerstandarddeviation.www.hackshp.cn5.Internetexercise;answerswillvarydependingontimeperiod.6.Internetexercise;answerswillvarydependingontimeperiod.7.Internetexercise;answerswillvarydependingontimeperiod.63khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.a.2015105000.511.52khdaw.comBetab.Marketriskpremium=rm–rf=0.12–0.04=0.08=8.0%c.Usethesecuritymarketline:r=rf+β(rm–rf)r=0.04+[1.5×(0.12–0.04)]=0.16=16.0%d.Foranyinvestment,wecanfindtheopportunitycostofcapitalusingthesecuritymarketline.Withβ=0.8,theopportunitycostofcapitalis:r=rf课后答案网+β(rm–rf)r=0.04+[0.8×(0.12–0.04)]=0.104=10.4%Theopportunitycostofcapitalis10.4%andtheinvestmentisexpectedtoearn9.8%.Therefore,theinvestmenthasanegativeNPV.www.hackshp.cne.Again,weusethesecuritymarketline:r=rf+β(rm–rf)0.112=0.04+β(0.12–0.04)⇒β=0.99.Internetexercise;answerswillvarydependingontimeperiod.10.Internetexercise;answerswillvary.64khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 11.a.Percival’scurrentportfolioprovidesanexpectedreturnof9%withanannualstandarddeviationof10%.FirstwefindtheportfolioweightsforacombinationofTreasurybills(security1:standarddeviation=0%)andtheindexfund(security2:standarddeviation=16%)suchthatportfoliostandarddeviationis10%.Ingeneral,foratwosecurityportfolio:22222σP=x1σ1+2x1x2σ1σ2ρ12+x2σ2222(0.10)=0+0+x2(0.16)x2=0.625⇒x1=0.375Further:rkhdaw.comp=x1r1+x2r2rp=(0.375×0.06)+(0.625×0.14)=0.11=11.0%Therefore,hecanimprovehisexpectedrateofreturnwithoutchangingtheriskofhisportfolio.b.Withequalamountsinthecorporatebondportfolio(security1)andtheindexfund(security2),theexpectedreturnis:rp=x1r1+x2r2rp=(0.5×0.09)+(0.5×0.14)=0.115=11.5%22222σP=x1σ1+2x1x2σ1σ2ρ12+x2σ22课后答案网2222σP=(0.5)(0.10)+2(0.5)(0.5)(0.10)(0.16)(0.10)+(0.5)(0.16)σ2P=0.0097σP=0.985=9.85%www.hackshp.cnTherefore,hecandoevenbetterbyinvestingequalamountsinthecorporatebondportfolioandtheindexfund.Hisexpectedreturnincreasesto11.5%andthestandarddeviationofhisportfoliodecreasesto9.85%.12.a.True.Bydefinition,thefactorsrepresentmacro-economicrisksthatcannotbeeliminatedbydiversification.b.False.TheAPTdoesnotspecifythefactors.c.True.Differentresearchershaveproposedandempiricallyinvestigateddifferentfactors,butthereisnowidelyacceptedtheoryastowhatthesefactorsshouldbe.d.True.Tobeuseful,wemustbeabletoestimatetherelevantparameters.Ifthisisimpossible,forwhateverreason,themodelitselfwillbeoftheoreticalinterestonly.65khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 13.StockP:r=5%+(1.0×6.4%)+[(–2.0)×(–0.6%)]+[(–0.2)×5.1%]=11.58%2StockP:r=5%+(1.2×6.4%)+[0×(–0.6%)]+(0.3×5.1%)=14.21%3StockP:r=5%+(0.3×6.4%)+[0.5×(–0.6%)]+(1.0×5.1%)=11.72%14.a.Factorriskexposures:b1(Market)=[(1/3)×1.0]+[(1/3)×1.2]+[(1/3)×0.3]=0.83b2(Interestrate)=[(1/3)×(–2.0)]+[(1/3)×0]+[(1/3)×0.5]=–0.50b3(Yieldspread)=[(1/3)×(–0.2)]+[(1/3)×0.3]+[(1/3)×1.0]=0.37khdaw.comb.rP=5%+(0.83×6.4%)+[(–0.50)×(–0.6%)]+[0.37×5.1%]=12.50%15.rC=1.0%+(0.30×7.6%)+(–0.09×3.9%)+(0.35×4.4%)=4.47%rF=1.0%+(1.38×7.6%)+(–0.01×3.9%)+(1.11×4.4%)=16.33%rP=1.0%+(0.36×7.6%)+(–0.69×3.9%)+(–0.03×4.4%)=0.91%rM=1.0%+(1.54×7.6%)+(0.13×3.9%)+(–0.24×4.4%)=12.16%课后答案网www.hackshp.cn66khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Ingeneral,foratwo-securityportfolio:22222σp=x1σ1+2x1x2σ1σ2ρ12+x2σ2and:x1+x2=1Substitutingforx2intermsofx1andrearranging:222222σp=σ1x1+2σ1σ2ρ12(x1–x1)+σ2(1–x1)2khdaw.comTakingthederivativeofσpwithrespecttox1,settingthederivativeequaltozeroandrearranging:222x1(σ1–2σ1σ2ρ12+σ2)+(σ1σ2ρ12–σ2)=0LetExxonMobilbesecurityone(σ1=0.182)andCoca-Colabesecuritytwo(σ2=0.273).Substitutingthesenumbers,alongwithρ12=0.4,wehave:x1=0.8049Therefore:x2=0.1951课后答案网2.a.Theratio(expectedriskpremium/standarddeviation)foreachofthefourportfoliosisasfollows:PortfolioA:(28.0–10.0)/72.9=0.247PortfolioB:(18.9–10.0)/21.2=0.420www.hackshp.cnPortfolioC:(15.4–10.0)/15.6=0.346PortfolioD:(11.3–10.0)/13.0=0.100Therefore,aninvestorshouldholdPortfolioB.b.ThebetaforAmazonrelativetoPortfolioBisequaltotheratiooftheriskpremiumofAmazontotheriskpremiumoftheportfoliotimesthebetaoftheportfolio:[(28.0%-10.0%)/(18.9%-10%)]×1.0=2.02267khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Similarly,thebetasfortheremainderoftheholdingsareasfollows:βAmazon=2.022βDell=1.461βReebok=0.899βMicro=1.348βFord=1.124βGE=0.337βCC=0.562βPfizer=0.225khdaw.comβHeinz=-0.225βEx-M=0.000c.Iftheinterestrateis5%,thenPortfolioCbecomestheoptimalportfolio,asindicatedbythefollowingcalculations:PortfolioA:(28.0–5.0)/72.9=0.316PortfolioB:(18.9–5.0)/21.2=0.656PortfolioC:(15.4–5.0)/15.6=0.667PortfolioD:(11.3–5.0)/13.0=0.485ThebetasfortheholdingsinPortfolioCare:课后答案网βAmazon=2.212βDell=1.731βReebokwww.hackshp.cn=1.250βMicro=1.635βFord=1.442βGE=0.769βCC=0.962βPfizer=0.673βHeinz=0.288βEx-M=0.48168khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.LetrxbetheriskpremiumoninvestmentX,letxxbetheportfolioweightofX(andsimilarlyforInvestmentsYandZ,respectively).a.rx=(1.75×0.04)+(0.25×0.08)=0.09=9.0%ry=[(–1.00)×0.04]+(2.00×0.08)=0.12=12.0%rz=(2.00×0.04)+(1.00×0.08)=0.16=16.0%b.Thisportfoliohasthefollowingportfolioweights:xx=200/(200+50–150)=2.0xy=50/(200+50–150)=0.5khdaw.comxz=–150/(200+50–150)=–1.5Theportfolio’ssensitivitiestothefactorsare:Factor1:(2.0×1.75)+[0.5×(–1.00)]–(1.5×2.00)=0Factor2:(2.0×0.25)+(0.5×2.00)–(1.5×1.00)=0Becausethesensitivitiesarebothzero,theexpectedriskpremiumiszero.c.Thisportfoliohasthefollowingportfolioweights:xx=80/(80+60–40)=0.8xy=60/(80+60–40)=0.6课后答案网xz=–40/(80+60–40)=–0.4Thesensitivitiesofthisportfoliotothefactorsare:Factor1:(0.8www.hackshp.cn×1.75)+[0.6×(–1.00)]–(0.4×2.00)=0Factor2:(0.8×0.25)+(0.6×2.00)–(0.4×1.00)=1.0Theexpectedriskpremiumforthisportfolioisequaltotheexpectedriskpremiumforthesecondfactor,or8percent.69khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com d.Thisportfoliohasthefollowingportfolioweights:xx=160/(160+20–80)=1.6xy=20/(160+20–80)=0.2xz=–80/(160+20–80)=–0.8Thesensitivitiesofthisportfoliotothefactorsare:Factor1:(1.6×1.75)+[0.2×(–1.00)]–(0.8×2.00)=1.0Factor2:(1.6×0.25)+(0.2×2.00)–(0.8×1.00)=0Theexpectedriskpremiumforthisportfolioisequaltotheexpectedriskpremiumforthefirstfactor,or4percent.khdaw.come.Thesensitivityrequirementcanbeexpressedas:Factor1:(xx)(1.75)+(xy)(–1.00)+(xz)(2.00)=0.5Inaddition,weknowthat:xx+xy+xz=1Withtwolinearequationsinthreevariables,thereisaninfinitenumberofsolutions.Twooftheseare:1.xx=0xy=0.5xz=0.52.xx=6/11课后答案网xy=5/11xz=0Theriskpremiumsforthesetwofundsare:r1=0×[(1.75×0.04)+(0.25×0.08)]+(0.5)×www.hackshp.cn[(–1.00×0.04)+(2.00×0.08)]+(0.5)×[(2.00×0.04)+(1.00×0.08)]=0.14=14.0%r2=(6/11)×[(1.75×0.04)+(0.25×0.08)]+(5/11)×[(–1.00×0.04)+(2.00×0.08)]+0×[(2.00×0.04)+(1.00×0.08)]=0.104=10.4%Theseriskpremiumsdifferbecause,whileeachfundhasasensitivityof0.5tofactor1,theydifferintheirsensitivitiestofactor2.70khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com f.BecausethesensitivitiestothetwofactorsarethesameasinPart(b),oneportfoliowithzerosensitivitytoeachfactorisgivenby:xx=2.0xy=0.5xz=–1.5Theriskpremiumforthisportfoliois:(2.0×0.08)+(0.5×0.14)–(1.5×0.16)=–0.01Becausethisisanexampleofaportfoliowithzerosensitivitytoeachfactorandanonzeroriskpremium,itisclearthattheArbitragePricingTheorydoesnotholdinthiscase.Aportfoliowithapositiveriskpremiumis:xkhdaw.comx=–2.0xy=–0.5xz=1.5课后答案网www.hackshp.cn71khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER9CapitalBudgetingandRiskAnswerstoPracticeQuestions1.a.requity=rf+β×(rm–rf)=0.04+(1.5×0.06)=0.13=13%DE⎛$4million⎞⎛$6million⎞b.rassets=rdebt+requity=⎜×0.04⎟+⎜×0.13⎟VV⎝$10million⎠⎝$10million⎠rassets=0.094=9.4%khdaw.comc.Thecostofcapitaldependsontheriskoftheprojectbeingevaluated.Iftheriskoftheprojectissimilartotheriskoftheotherassetsofthecompany,thentheappropriaterateofreturnisthecompanycostofcapital.Here,theappropriatediscountrateis9.4%.d.requity=rf+β×(rm–rf)=0.04+(1.2×0.06)=0.112=11.2%DE⎛$4million⎞⎛$6million⎞rassets=rdebt+requity=⎜×0.04⎟+⎜×0.112⎟VV⎝$10million⎠⎝$10million⎠rassets=0.0832=8.32%课后答案网2.a.⎛D⎞⎛P⎞⎛C⎞βassets=⎜βdebtwww.hackshp.cn×⎟+⎜βpreferred×⎟+⎜βcommon×⎟=⎝V⎠⎝V⎠⎝V⎠⎛$100million⎞⎛$40million⎞⎛$200million⎞⎜0×⎟+⎜0.20×⎟×⎜1.20×⎟=0.729⎝$340million⎠⎝$340million⎠⎝$340million⎠b.r=rf+β×(rm–rf)=0.05+(0.729×0.06)=0.09374=9.374%3.Internetexercise;answerswillvary.4.Internetexercise;answerswillvary.72khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 25.a.TheRvalueforAlcanwas0.15,whichmeansthat15%oftotalriskcomesfrommovementsinthemarket(i.e.,marketrisk).Therefore,85%oftotalriskisuniquerisk.2TheRvalueforIncowas0.22,whichmeansthat22%oftotalriskcomesfrommovementsinthemarket(i.e.,marketrisk).Therefore,78%oftotalriskisuniquerisk.2b.ThevarianceofAlcanis:(24)=576MarketriskforAlcan:0.15×576=86.4UniqueriskforAlcan:0.85×576=489.62ThevarianceofIncois:(29)=841khdaw.comMarketriskforInco:0.22×841=185.02UniqueriskforInco:0.78×841=655.98c.Thet-statisticforβINCOis:1.04/0.26=4.09Thisissignificantatthe1%level,sothattheconfidencelevelis99%.d.rAL=rf+βAL×(rm–rf)=0.05+[0.69×(0.12–0.05)]=0.0983=9.83%e.rIN=rf+βIN×(rm–rf)=0.05+[0.69×(0–0.05)]=0.0155=1.55%6.Internetexercise;answerswillvary.课后答案网7.Thetotalmarketvalueofoutstandingdebtis$300,000.Thecostofdebtcapitalis8percent.Forthecommonstock,theoutstandingmarketvalueis:$50×10,000=$500,000.Thecostofequitycapitalis15percent.Thus,www.hackshp.cnLorelei’sweighted-averagecostofcapitalis:⎛300,000⎞⎛500,000⎞r=⎜⎟×0.08+⎜⎟×(0.15)assets⎜300,000+500,000⎟⎜300,000+500,000⎟⎝⎠⎝⎠rassets=0.124=12.4%8.a.rBN=rf+βBN×(rm–rf)=0.035+(0.53×0.08)=0.0774=7.74%rIND=rf+βIND×(rm–rf)=0.035+(0.49×0.08)=0.0742=7.42%b.No,wecannotbeconfidentthatBurlington’struebetaisnottheindustryaverage.ThedifferencebetweenβBNandβIND(0.04)islessthanonestandarderror(0.20),sowecannotrejectthehypothesisthatβBN=βIND.73khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Burlington’sbetamightbedifferentfromtheindustrybetaforavarietyofreasons.Forexample,Burlington’sbusinessmightbemorecyclicalthanisthecaseforthetypicalfirmintheindustry.OrBurlingtonmighthavemorefixedoperatingcosts,sothatoperatingleverageishigher.AnotherpossibilityisthatBurlingtonhasmoredebtthanistypicalfortheindustrysothatithashigherfinancialleverage.9.a.Ifyouagreetothefixedpricecontract,operatingleverageincreases.Changesinrevenueresultingreaterthanproportionatechangesinprofit.Ifallcostsarevariable,thenchangesinrevenueresultinproportionatechangesinprofit.Businessrisk,measuredbyβassets,alsoincreasesasakhdaw.comresultofthefixedpricecontract.Iffixedcostsequalzero,then:βassets=βrevenue.However,asPV(fixedcost)increases,βassetsincreases.b.Withthefixedpricecontract:PV(assets)=PV(revenue)–PV(fixedcost)–PV(variablecost)$20million$10millionPV(assets)=−($10million)×(annuityfactor6%,10years-)90.09(0.09)×(1.09)PV(assets)=$97,462,710Withoutthefixedpricecontract:PV(assets)=PV(revenue)–PV(variablecost)课后答案网$20million$10millionPV(assets)=−0.090.09PV(assets)=$111,111,111www.hackshp.cn10.a.Thethreatofacoupd’étatmeansthattheexpectedcashflowislessthan$250,000.Thethreatcouldalsoincreasethediscountrate,butonlyifitincreasesmarketrisk.b.Theexpectedcashflowis:(0.25×0)+(0.75×250,000)=$187,500Assumingthatthecashflowisaboutasriskyastherestofthecompany’sbusiness:PV=$187,500/1.12=$167,41174khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 11.a.Expecteddailyproduction=(0.2×0)+0.8×[(0.4x1,000)+(0.6x5,000)]=2,720barrelsExpectedannualcashrevenues=2,720x365x$15=$14,892,000b.Thepossibilityofadryholeisadiversifiableriskandshouldnotaffectthediscountrate.Thispossibilityshouldaffectforecastedcashflows,however.SeePart(a).12.Theopportunitycostofcapitalisgivenby:rkhdaw.com=rf+β(rm–rf)=0.05+(1.2×0.06)=0.122=12.2%Therefore:CEQ1=150(1.05/1.122)=140.372CEQ2=150(1.05/1.122)=131.373CEQ3=150(1.05/1.122)=122.944CEQ4=150(1.05/1.122)=115.055CEQ5=150(1.05/1.122)=107.67a1=140.37/150=0.9358a2=131.37/150=0.8758a3=122.94/150=0.8196课后答案网a4=115.05/150=0.7670a5=107.67/150=0.7178Fromthis,wecanseethattheawww.hackshp.cntvaluesdeclinebyaconstantproportioneachyear:a2/a1=0.8758/0.9358=0.9358a3/a2=0.8196/0.8758=0.9358a4/a3=0.7670/0.8196=0.9358a5/a4=0.7178/0.7670=0.935875khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 13.a.UsingtheSecurityMarketLine,wefindthecostofcapital:r=0.07+[1.5×(0.16–0.07)]=0.205=20.5%Therefore:406050PV=+2+3=103.091.2051.2051.205b.CEQ1=40×(1.07/1.205)=35.52CEQ22=60×(1.07/1.205)=47.31CEQ33=50×(1.07/1.205)=35.01c.khdaw.coma1=35.52/40=0.8880a2=47.31/60=0.7885a3=35.01/50=0.7002d.Usingaconstantrisk-adjusteddiscountrateisequivalenttoassumingthatatdecreasesataconstantcompoundedrate.14.Att=2,therearetwopossiblevaluesfortheproject’sNPV:NPV2if(test课后答案网isnotsuccessful)=0700,000NPVif(testissuccessful)=−5,000,000+=$833,33320.12Therefore,att=0:www.hackshp.cn(0.40×0)+(0.60×833,333)NPV=−500,000+=−$244,89801.40215.Ratioofσ’sCorrelationBetaBrazil6.290.53.15Egypt5.670.52.84India6.100.53.05Indonesia7.290.53.65Mexico3.920.51.96Poland3.210.51.61Thailand6.320.53.16SouthAfrica4.040.52.0276khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ThebetasincreasecomparedtothosereportedinTable9.2becausethereturnsforthesemarketsarenowmorehighlycorrelatedwiththeU.S.market.Thus,thecontributiontooverallmarketriskbecomesgreater.16.TheinformationcouldbehelpfultoaU.S.companyconsideringinternationalcapitalinvestmentprojects.Byexaminingthebetaestimates,suchcompaniescanevaluatethecontributiontoriskofthepotentialcashflows.AGermancompanywouldnotfindthisinformationuseful.Therelevantriskdependsonthebetaofthecountryrelativetotheportfolioheldbyinvestors.Germaninvestorsdonotinvestexclusively,orevenprimarily,inU.S.companystocks.TheyinvestthemajorportionoftheirportfoliosinGermancompanykhdaw.comstocks.课后答案网www.hackshp.cn77khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Itiscorrectthat,forahighbetaproject,youshoulddiscountallcashflowsatahighrate.Thus,thehighertheriskofthecashoutflows,thelessyoushouldworryaboutthembecause,thehigherthediscountrate,thecloserthepresentvalueofthesecashflowsistozero.Thisresultdoesmakesense.Itisbettertohaveaseriesofpaymentsthatarehighwhenthemarketisboomingandlowwhenitisslumping(i.e.,ahighbeta)thanthereverse.Thebetaofaninvestmentisindependentofthesignofthecashflows.Ifaninvestmenthasahighbetaforanyonepayingoutthecashflows,itmusthaveakhdaw.comhighbetaforanyonereceivingthem.Ifthesignofthecashflowsaffectedthediscountrate,eachassetwouldhaveonevalueforthebuyerandonefortheseller,whichisclearlyanimpossiblesituation.2.a.Sincetheriskofadryholeisunlikelytobemarket-related,wecanusethesamediscountrateasforproducingwells.Thus,usingtheSecurityMarketLine:rnominal=0.06+(0.9×0.08)=0.132=13.2%Weknowthat:(1+r课后答案网nominal)=(1+rreal)×(1+rinflation)Therefore:1.132r=−1=0.0885=8.85%realwww.hackshp.cn1.04103millionb.NPV1=−10million+∑t=−10million+[(3million)×(3.1914)]t=11.2885NPV=−$425,8001152millionNPV2=−10million+∑t=−10million+[(2million)×(3.3888)]t=11.2885NPV2=−$3,222,300c.ExpectedincomefromWell1:[(0.2×0)+(0.8×3million)]=$2.4millionExpectedincomefromWell2:[(0.2×0)+(0.8×2million)]=$1.6millionDiscountingat8.85percentgives:102.4millionNPV1=−10million+∑t=−10million+[(2.4million)×(6.4602)]t=11.088578khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com NPV=$5,504,6001151.6millionNPV2=−10million+∑t=−10million+[(1.6million)×(8.1326)]t=11.0885NPV2=$3,012,100d.ForWell1,onecancertainlyfindadiscountrate(andhencea“fudgefactor”)that,whenappliedtocashflowsof$3millionperyearfor10years,willyieldthecorrectNPVof$5,504,600.Similarly,forWell2,onecanfindtheappropriatediscountrate.However,thesetwo“fudgefactors”willbedifferent.Specifically,Well2willhaveasmaller“fudgefactor”becauseitscashflowsaremoredistant.Withmoredistantcashflows,asmallerkhdaw.comadditiontothediscountratehasalargerimpactonpresentvalue.3.Internetexercise;answerswillvary.课后答案网www.hackshp.cn79khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER10AProjectisNotaBlackBoxAnswerstoPracticeQuestions1.Year0Years1-10Investment¥15B1.Revenue¥44.000B2.VariableCost39.600B3.FixedCost2.000Bkhdaw.com4.Depreciation1.500B5.Pre-taxProfit¥0.900B6.Tax@35%0.315B7.NetOperatingProfit¥0.585B8.OperatingCashFlow¥2.085B10?.085BNPV=−?5B+∑t=−?.19Bt=11.102.Thespreadsheetsshowthefollowingresults:NPVPessimistic课后答案网ExpectedOptimisticMarketSize0.26.212.2MarketShare-11.86.224.2UnitPrice-23.86.216.2UnitVariableCostwww.hackshp.cn-13.86.216.2FixedCost-1.86.214.2Theprincipaluncertaintiesaremarketshare,unitprice,andunitvariablecost.3.a.Year0Years1-10Investment¥30B1.Revenue¥37.500B2.VariableCost26.0003.FixedCost3.0004.Depreciation3.0005.Pre-taxProfit(1-2-3-4)¥5.5006.Tax1.9257.NetOperatingProfit(5-6)¥3.5758.OperatingCashFlow(4+7)6.575NPV=+¥10.40B80khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.(Seechartonnextpage.)InflowsOutflowsUnitSalesRevenuesInvestmentV.CostsF.CostTaxesPVPVNPV(000’s)Yrs1-10Yr0Yr1-10Yr1-10Yr1-10InflowsOutflows00.0030.000.003.00-2.100.0-35.5-35.510037.5030.0026.003.001.93230.4-220.010.420075.0030.0052.003.005.95460.8-404.556.3Notethatthebreak-evenpointcanbefoundalgebraicallyasfollows:NPV=-Investment+[(PVA10/10%)×(t×Depreciation)]+[Quantity×(Price–V.Cost)–F.Cost]×(1–t)×(PVA10/10%)SetNPVequaltozeroandsolveforQ:khdaw.comI−(PVA10/10%×D×t)FQ=+(PVA)×(P−V)×(1−t)P−V10/10%30,000,000,000−6,451,795,4613,000,000,000=+(6.144567)×(375,000−260,000)×(0.65)375,000−260,00023,548,204,5393,000,000,000=+=51,269+26,087=77,356459,306115,000Proof:课后答案网1.Revenue¥29.00B2.VariableCost20.113.FixedCost3.004.Depreciationwww.hackshp.cn3.005.Pre-taxProfit¥2.89B6.Tax1.017.NetProfit¥1.888.OperatingCashFlow¥4.88104.88NPV=∑−30=29.99−30=−0.01tt=1(1.10)(differenceduetorounding)81khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Break-EvenPV(BillionsofYen)500450PVInflows400PVOutflows350300Break-Even250NPV=0200•khdaw.com1501005000100200Units(000"s)c.Thebreak-evenpointisthepointwherethepresentvalueofthecashflows,includingtheopportunitycostofcapital,yieldsazeroNPV.课后答案网d.Tofindthelevelofcostsatwhichtheprojectwouldearnzeroprofit,writetheequationfornetprofit,setnetprofitequaltozero,andsolveforvariablecosts:www.hackshp.cnNetProfit=(R–VC–FC-D)×(1–t)0=(37.5–VC–3.0–1.5)×(0.65)VC=33.0Thiswillyieldzeroprofit.Next,findthelevelofcostsatwhichtheprojectwouldhavezeroNPV.UsingthedatainTable10.1,theequivalentannualcashflowyieldingazeroNPVwouldbe:¥15B/PVA10/10%=¥2.4412B82khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Ifwerewritethecashflowequationandsolveforthevariablecost:NCF=[(R–VC–FC–D)×(1–t)]+D2.4412=[(37.5–VC–3.0–1.5)×(0.65)]+1.5VC=31.55ThiswillyieldNPV=0,assumingthetaxcreditscanbeusedelsewhereinthecompany.4.IfRusticreplacesnowratherthaninoneyear,severalthingshappen:i.Itincurstheequivalentannualcostofthe$9millioncapitalinvestment.khdaw.comii.Itreducesmanufacturingcosts.Forexample,forthe“Expected”case,analyzing“Sales”wehave(alldollarfiguresinmillions):i.Theeconomiclifeofthenewmachineisexpectedtobe10years,sotheequivalentannualcostofthenewmachineis:$9/5.6502=$1.59ii.Thereductioninmanufacturingcostsis:0.5×$4=$2.00Thus,theequivalentannualcostsavingsis:–$1.59+$2.00=$0.41课后答案网Continuingtheanalysisfortheothercases,wefind:EquivalentAnnualCostSavings(Millions)Pessimisticwww.hackshp.cnExpectedOptimisticSales0.010.411.21ManufacturingCost-0.590.410.91EconomicLife0.030.410.605.FromthesolutiontoProblem4,weknowthat,intermsofpotentialnegativeoutcomes,manufacturingcostisthekeyvariable.Rusticshouldgoaheadwiththestudy,becausethecostofthestudyisconsiderablylessthanthepossibleannuallossifthepessimisticmanufacturingcostestimateisrealized.83khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com %changeinoperatingincome6.a.Operatingleverage=%changeinsalesFora1%increaseinsales,from100,000unitsto101,000units:0.0753/Operatingleverage==2.500.375/37.5fixedcost+deprecationb.Operatingleverage=1+operatingprofit(3.0+1.5)=1+=2.5khdaw.com3.0%changeinoperatingincomec.Operatingleverage=%changeinsalesFora1%increaseinsales,from200,000unitsto202,000units:(10.65-10.5)/10.5Operatingleverage==1.43(75.75-75)/757.Investinfull-scaleproduction:课后答案网HighdemandNPV=-1000+(250/0.10)(50%=+$1,500probability)www.hackshp.cnPilotObserveproductiondemandandmarkettestsLowStop:demandNPV=$0(50%probability)[Forfull-scaleproduction:NPV=-1000+(75/0.10)=-$250]84khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.ProblemrequiresuseofExcelprogram;answerswillvary.9.a.Timingoptionb.Expansionoptionc.Abandonmentoptiond.Productionoptione.Expansionoption10.khdaw.coma.TheexpectedvalueoftheNPVfortheplantis:(0.5×$140million)+(0.5×$50million)–$100million=–$5millionSincetheexpectedNPVisnegativeyouwouldnotbuildtheplant.b.TheexpectedNPVisnow:(0.5×$140million)+(0.5×$90million)–$100million=+$15millionSincetheexpectedNPVisnowpositive,youwouldbuildtheplant.c.Continueproduction:课后答案网LineissuccessfulNPV=$140million-$100million(50%=+$40millionprobability)www.hackshp.cnContinueproduction:BuildautoObserveplantdemandNPV=$50million–(Cost=$100$100millionmillion)=-$50millionLineisunsuccessful(50%probability)Sellplant:NPV=$90million–$100million=-$10million85khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 11.(SeeFigure10.8onthenextfewpages,whichisarevisionofFigure10.7presentedinthetext.)Whichplaneshouldwebuy?Weanalyzethedecisiontreebyworkingbackwards.So,forexample,ifwepurchasethepistonplaneanddemandishigh:•TheNPVatt=1ofthe‘Expanded’branchis:(0.8×800)+(0.2×100)−150+=$4611.08•TheNPVatt=1ofthe‘Continue’branchis:khdaw.com(0.8×410)+(0.2×180)=$3371.08Thus,ifwepurchasethepistonplaneanddemandishigh,weshouldexpandfurtheratt=1.ThisbranchhasthehighestNPV.Similarly,ifwepurchasethepistonplaneanddemandislow:•TheNPVofthe‘Continue’branchis:(0.4×220)+(0.6×100)=$1371.08•WecannowusetheseresultstocalculatetheNPVofthe‘Piston’branchatt=0:课后答案网(0.6)×(100+461)+(0.4)×(50+137)−180+=$2011.08•Similarlyforthe‘Turbo’branch,ifdemandishigh,theexpectedcashflowatwww.hackshp.cnt=1is:(0.8×960)+(0.2×220)=$812•Ifdemandislow,theexpectedcashflowis:(0.4×930)+(0.6×140)=$456•So,forthe‘Turbo’branch,thecombinedNPVis:(0.6×150)+(0.4×30)(0.6×812)+(0.4×456)NPV=−350++=$3192(1.08)(1.08)Therefore,thecompanyshouldbuytheturboplane.86khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Inordertodeterminethevalueoftheoptiontoexpand,wefirstcomputetheNPVwithouttheoptiontoexpand:(0.6×100)+(0.4×50)NPV=−250++(1.08)(0.6)[(0.8×410)+(0.2×180)]+(0.4)[(0.4×220)+(0.6×100)]=$62.072(1.08)Therefore,thevalueoftheoptiontoexpandis:$201–$62=$139khdaw.com课后答案网www.hackshp.cn87khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com FIGURE10.8Hidemand(.8)Continue$960Hidemand(.6)Lodemand(.2)$150$220khdaw.comHidemand(.4)Continue$930Lodemand(.4)Lodemand(.6)Turbo$30$140-$350Hidemand(.8)$800Expand-$150Lodemand(.2)Piston$100-$180课后答案网Hidemand(.8)$410Hidemand(.6)Continue$100Lodemand(.2)www.hackshp.cn$180Hidemand(.4)Continue$220Lodemand(.4)Lodemand(.6)$50$10088khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 12.a.Ms.Magnashouldbepreparedtoselleitherplaneatt=1ifthepresentvalueoftheexpectedcashflowsislessthanthepresentvalueofsellingtheplane.b.SeeFigure10.9(onthenextfewpages),whichisarevisionofFigure10.7presentedinthetext.c.Weanalyzethedecisiontreebyworkingbackwards.So,forexample,ifwepurchasethepistonplaneanddemandishigh:°TheNPVatt=1ofthe‘Expand’branchis:(0.8×800)+(0.2×100)−150+=$461khdaw.com1.08°TheNPVatt=1ofthe‘Continue’branchis:(0.8×410)+(0.2×180)=$3371.08°TheNPVatt=1ofthe‘Quit’branchis$150.Thus,ifwepurchasethepistonplaneanddemandishigh,weshouldexpandfurtheratt=1becausethisbranchhasthehighestNPV.Similarly,ifwepurchasethepistonplaneanddemandislow:°TheNPVofthe‘Continue’branchis:课后答案网(0.4×220)+(0.6×100)=$1371.08°TheNPVofthe‘Quit’branchis$150www.hackshp.cnThus,ifwepurchasethepistonplaneanddemandislow,weshouldselltheplaneatt=1becausethisalternativehasahigherNPV.Puttingtheseresultstogether,wecalculatetheNPVofthe‘Piston’branchatt=0:(0.6)×(100+461)+(0.4)×(50+150)−180+=$2061.08°Similarlyforthe‘Turbo’branch,ifdemandishigh,theNPVatt=1is:(0.8×960)+(0.2×220)=$7521.08°TheNPVatt=1of‘Quit’is$500.°Ifdemandislow,theNPVatt=1of‘Quit’is$500.89khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com °TheNPVof‘Continue’is:(0.4×930)+(0.6×140)=$4221.08Inthiscase,‘Quit’isbetterthan‘Continue.’Therefore,forthe‘Turbo’branchatt=0,theNPVis:0.6×(150+752)+0.4×(30+500)−350+=$3471.08Withtheabandonmentoption,theturbohasthegreaterNPV,$347comparedto$206forthepiston.khdaw.comd.Thevalueoftheabandonmentoptionisdifferentforthetwodifferentplanes.Forthepistonplane,withouttheabandonmentoption,NPVatt=0is:0.6×(100+461)+0.4×(50+137)−180+=$2011.08Thus,forthepistonplane,theabandonmentoptionhasavalueof:$206–$201=$5Fortheturboplane,withouttheabandonmentoption,NPVatt=0is:0.6×(150+752)+0.4×(30+422)−350课后答案网+=$3191.08Fortheturboplane,theabandonmentoptionhasavalueof:$347–$319=$28www.hackshp.cn90khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com FIGURE10.9Hidemand(.8)Continue$960Hidemand(.6)Lodemand(.2)$150$220Quit$500khdaw.comHidemand(.4)Continue$930Lodemand(.4)Lodemand(.6)Turbo$30$140-$350Quit$500Hidemand(.8)$800Expand-$150Lodemand(.2)Piston课后答案网$100-$180Hidemand(.8)$410Hidemand(.6)Continue$100www.hackshp.cnLodemand(.2)Quit$180$150Hidemand(.4)Continue$220Lodemand(.4)Lodemand(.6)$50$100Quit$15091khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.1.Assumeweopenthemineatt=0.Takingintoaccountthedistributionofpossiblefuturepricesofgoldoverthenext3years,wehave:1,000×[(0.5×550)+(0.5×450)−460]NPV=−100,000+1.1021,000×[(0.5)×(600+500+500+400)−460]+21.1031,000×[(0.5)×(650+550+550+550+450+450+450+350)−460]+=−$5263khdaw.com1.10Noticethattheansweristhesameifwesimplyassumethatthepriceofgoldremainsat$500.Thisisbecause,att=0,theexpectedpriceforallfutureperiodsis$500.BecausethisNPVisnegative,weshouldnotopenthemineatt=0.Further,weknowthatitdoesnotmakesensetoplantoopenthemineatanypricelessthanorequalto$500perounce.2.Assumewewaituntilt=1andthenopenthemineifthepriceis$550.Atthatpoint:31,000×($550−$460)NPV=−$100,000+∑t=$123,817课后答案网t=11.10Sinceitisequallylikelythatthepricewillriseorfallby$50fromitslevelatthestartoftheyear,then,att=1,ifthepricereaches$550,theexpectedpriceforallfutureperiodsisthen$550.TheNPV,att=0,ofthisNPVatt=1is:www.hackshp.cn$123,817/1.10=$112,561Ifthepricerisesto$550att=1,weshouldopenthemineatthattime.TheexpectedNPVofthisstrategyis:(0.50×$112,561)+(0.50×$0)=$56,280.5b.1.Supposeyouopenatt=0,whenthepriceis$500.Att=2,thereisa0.25probabilitythatthepricewillbe$400.Then,sincethepriceatt=3cannotriseabovetheextractioncost,themineshouldbeclosed.Att=1,thereisa0.5probabilitythatthepricewillbe$450.Inthatcase,youfacethefollowing,whereeachbranchhasaprobabilityof0.5:t=1t=2t=3⇒550⇒500450⇒450⇒400⇒Closemine92khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Tocheckwhetheryoushouldclosethemineatt=1,calculatethePVwiththemineopen:21,000×($500−$460)1,000×($400−$460)PV=0.5∑+0.5=$7,438tt=11.101.10Thus,ifyouopentheminewhenthepriceis$500,youshouldnotcloseifthepriceis$450att=1,butyoushouldcloseifthepriceis$400att=2.Thereisa0.25probabilitythatthepricewillbe$400att=1,andthenyouwillsaveanexpectedlossof$60,000att=3.Thus,thevalueoftheoptiontocloseis:(1,000×$60)0.25×=$11,270khdaw.com1.103NowcalculatethePV,att=1,forthebranchwithpriceequalto$550:2$90,000PV=∑=$246,198tt=01.10TheexpectedPVatt=1,withtheoptiontoclose,is:0.5×[$7,438+($450–$460)×1,000]+(0.5×$246,198)=$121,818TheNPVatt=0,withtheoptiontoclose,is:NPV=$121,818/1.10–100,000=$10,744课后答案网Therefore,openingthemineatt=0nowhasapositiveNPV.WecanverifythisresultbynotingthattheNPVfrompart(a)(withouttheoptiontoabandon)is–$526,andthevalueoftheoptiontoabandonis$11,270sothattheNPVwiththeoptiontoabandonis:www.hackshp.cnNPV=–$526+$11,270=10,7442.Nowassumethatwewaituntilt=1andthenopenthemineifthepriceis$550atthattime.Forthisstrategy,theminewillbeabandonedifpricereaches$450att=3becausetheexpectedprofitatt=4is:[(450–460)×1,000]=–$10,000Thus,withthisstrategy,thevalueoftheoptiontocloseis:40.125×($10,000/1.10)=$854Therefore,theNPVforthisstrategyis:$56,280.5[theNPVforthisstrategyfrompart(a)]plusthevalueoftheoptiontoclose:NPV=$56,280.5+$854=$57,134.593khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Theoptiontoclosethemineincreasesthenetpresentvalueforeachstrategy,buttheoptimalchoiceremainsthesame;thatis,strategy2isstillthepreferablealternativebecauseitsNPV($57,134.5)isstillgreaterthantheNPVforstrategy1($10,744).2.ProblemrequiresuseofCrystalBall™softwaresimulation;answerswillvary.khdaw.com课后答案网www.hackshp.cn94khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER11StrategyandtheCapitalInvestmentDecisionAnswerstoPracticeQuestions1.The757mustbeazero-NPVinvestmentforthemarginaluser.UnlessBoeingcanchargedifferentpricestodifferentusers(whichisprecludedwithasecondarymarket),Deltawillearneconomicrentsifthe757isparticularlywellsuitedtoDelta’sroutes(andcompetitiondoesnotforceDeltatopassthecostsavingsthroughtocustomersintheformoflowerfares).Thus,thedecisionfocusesontheissueofwhethertheplaneisworthmoreinDelta’shandsthaninthehandsofthemarginaluser.khdaw.coma.Withagoodsecondarymarketandinformationonpastchangesinaircraftprices,itbecomessomewhatmorefeasibletoignorecashflowsbeyondthefirstfewyearsandtosubstitutetheexpectedresidualvalueoftheplane.b.Pastaircraftpricesmaybeusedtoestimatesystematicrisk(seeChapter9).c.Theexistenceofasecondarymarketmakesitmoreimportanttotakenoteoftheabandonmentoption(seeChapter10).2.Thekeyquestionis:WillGammaAirlinesbeabletoearneconomicrentsontheAkron-Yellowkniferoute?Thenecessarystepsinclude:a.Forecastingcosts,includingthecostofbuildingandmaintainingterminal课后答案网facilities,allnecessarytraining,advertising,equipment,etc.b.Forecastingrevenues,whichincludesadetailedmarketdemandanalysis(whattypesoftravelersareexpectedandwhatpricescanbecharged)aswellasananalysisofthecompetition(ifGammaissuccessful,howquicklywww.hackshp.cnwouldcompetitionspringup?).c.Calculatingthenetpresentvalue.TheleasingmarketcomesintoplaybecauseittellsGammaAirlinestheopportunitycostoftheplanes,acriticalcomponentofcosts.IftheAkron-YellowknifeprojectisattractiveandgrowthoccursattheUlanBatorhub,GammaAirlinesshouldsimplyleaseadditionalaircraft.3.Thepriceof$280perouncerepresentsthediscountedvalueofexpectedfuturegoldprices.Hence,thepresentvalueof1millionouncesproduced8yearsfromnowshouldbe:($280×1million)=$280million95khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.First,considerthesequenceofevents:°Att=0,theinvestmentof$25,000,000ismade.°Att=1,productionbegins,sothefirstyearofrevenueandexpensesisrecordedatt=2.°Att=6,thepatentexpiresandcompetitionmayenter.Sinceittakesoneyeartoachievefullproduction,competitionisnotafactoruntilt=7.(Thisassumesthecompetitiondoesnotbeginconstructionuntilthepatentexpires.)°Aftert=7,fullcompetitionwillexistandthusanynewentrantintothemarketforBGswillearnthe9%costofcapital.Next,calculatethecashflows:°Att=0:–$25,000,000khdaw.com°Att=1:$0°Att=2,3,4,5,6:Saleof200,000unitsat$100each,withcostsof$65each,yearlycashflow=$7,000,000.°Aftert=6,theNPVofnewinvestmentmustbezero.Hence,tofindthesellingpriceperunit(P)solvethefollowingforP:200,000×(P−65)200,000×(P−65)0=−25,000,000++?+2121.091.09Solving,wefindP=$85.02sothat,foryearst=7throught=12,theyearlycashflowwillbe:[200,000×($85.02-$65)]=$4,004,000.Finally,thenetpresentvalue(inmillions):课后答案网7774.0044.004NPV=−25+++?+++?+2367121.091.091.091.091.09NPV=$10.69or$10,690,000www.hackshp.cn5.Thesellingpriceaftert=6nowchangesbecausetherequiredinvestmentis:5[$25,000,000×(1-0.03)]=$21,468,351Aftert=5,theNPVofnewinvestmentmustbezero,andhencethesellingpriceperunit(P)isfoundbysolvingthefollowingequationforP:(200,000)×(P−65)(200,000)×(P−65)0=−21,468,351++?+2121.091.09P=$82.19Thus,foryearst=7throught=12,theyearlycashflowwillbe:[200,000×($82.19-$65)]=$3,438,00096khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Finally,thenetpresentvalue(inmillions)is:7773.4383.438NPV=−25+++?+++?+2367121.091.091.091.091.09NPV=$9.18or$9,180,0006.a.Seethetablebelow.Thenetpresentvalueispositiveat$3.76million.However,thisseemslikeaverysmallmargin.Unlessthereissomefactorunaccountedforintheanalysis(e.g.,strategicpositionsuchthattheprojectcreatesanoptionforfutureexpansion),managementmightnotproceedwiththePolyzoneproject.khdaw.comt=0t=1t=2t=3t=4t=5t=6-10Investment100Production004080808080Spread1.201.201.201.201.201.100.95NetRevenues004896968876Prod.Costs003030303030Transport0048888OtherCosts0202020202020CashFlow-100-20-638383018NPV(at8%)=$3.76b.Seethetablebelow.Thenetpresentvalueis$14.68million,andsotheprojectisacceptable.课后答案网t=0t=1t=2t=3t=4t=5-10Investment100Productionwww.hackshp.cn04080808080Spread1.201.201.201.201.100.95NetRevenues04896968876Prod.Costs03060303030Transport048888OtherCosts02020202020CashFlow-100-68383018NPV(at8%)=$14.6897khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Seethetablebelow.Thenetpresentvalueis$18.64million,andsotheprojectisacceptable.However,theassumptionthatthetechnologicaladvancewilleludethecompetitionfortenyearsseemsquestionable.t=0t=1t=2t–3t=4t=5-10Investment100Production0040808080Spread1.201.201.201.201.100.95NetRevenues0048968876Prod.Costs0025252525Transport004888OtherCosts02020202020CashFlow-100-20-1433523khdaw.comNPV(at8%)=$18.647.Therearefourcomponentsthatcontributetothisproject’sNPV:°Theinitialinvestmentof$100,000.°Thedepreciationtaxshield.Depreciationexpenseis$20,000peryearforfiveyearsandisvaluedatthenominalrateofinterestbecauseitappliestonominalcashflows,i.e.,earnings.°Theafter-taxvalueoftheincreaseinsilveryield.Likegold,silverhaslowconvenienceyieldandstoragecost.(Youcanverifythisbycheckingthatthedifferencebetweenthefuturespriceandthespotpriceisapproximatelytheinterestsavingfrombuyingthefuturescontract.)Weconclude,therefore,课后答案网thatthePVofsilverdelivered(withcertainty)inthefutureisapproximatelytoday’sspotprice,andsothereisnoneedtoforecastthepriceofsilverandthendiscount.°Thecostofoperatingtheequipment.Thiscostis$80,000peryearfortenwww.hackshp.cnyearsandisnotvaluedattherealcompanycostofcapitalbecausewedonotassumeanyfutureincreaseincostduetoinflation.Weareconcernedonlywiththeafter-taxcost.Assumethatthenominalinterestrateis11percent.Then:50.35×20,000NPV=−100,000+∑+(1−0.35)×(10×5,000×20)tt=11.1110(1−0.35)×80,000−∑=$226,947tt=11.0898khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.Assumewecanignoredividendspaidonthestockmarketindex.OnJune30,2008,eachticketmustsellfor$100becausethisdatemarksthebaseperiodforthereturncalculation.Atthisprice,investmentinaticketwillofferthesamereturnasinvestmentintheindex.OnJanuary1,2008,youknowthateachticketwillbeworth$100in6months.Therefore,onJanuary1,2005,aticketwillbeworth:1/2$100/(1.10)=$95.35ThepricewillbethesameforaticketbasedontheDowJonesIndustrialAverage.9.khdaw.comIfavailableforimmediateoccupancy,thebuildingwouldbeworth$1million.Butbecauseitwilltakethecompanyoneyeartoclearitout,thecompanywillincur$200,000inclean-upcostsandwilllose$80,000netrent.Assumebothrentandcostsarespreadevenlythroughouttheyear.Thus(alldollaramountsareinthousands):PV=1,000–PV(200+80)=1,000–(280×0.962)=731Sincethesellingpriceateachdateisthepresentvalueofforecastedrents,theonlyeffectofpostponingthesaletoyear2istopostponethesalescommission.Thecommissioniscurrently(0.05×1,000)=50andgrowsinlinewithpropertyvalue.Toestimatethegrowthrateofvalue,wecanusetheconstant-growthmodel:PV=1,000=80/(0.08–g)sothatg=0%课后答案网2Thus,thecommissioninyear2is:(50×1.00)and:22PV(commission)=50×(1.00/1.08)=43www.hackshp.cnThevalueofthewarehouse,netofthesalescommission,is:731–43=688or$688,00099khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.TheNPVofsuchplantsislikelytobezero,becausetheindustryiscompetitiveand,aftertwoyears,nocompanywillenjoyanytechnicaladvantages.ThePVofeachofthesenewplantswouldbe$100,000becausetheNPViszeroandthecostis$100,000.b.ThePVofrevenuefromsuchaplantis:[100,000tons×(Price-0.85)]/0.10=100,000Therefore,thepriceofpolysyllabicacidwillbe$0.95perton.khdaw.comc.Att=2,thePVoftheexistingplantwillbe:[100,000tons×(0.95-0.90)]/0.10=$50,000Therefore,theexistingplantwouldbescrappedatt=2aslongasscrapvalueatthattimeexceeds$50,000.d.No.Bookvalueisirrelevant.NPVoftheexistingplantisnegativeafteryear2.e.Yes.Sunkcostsareirrelevant.NPVoftheexistingplantisnegativeafteryear2.课后答案网f.Phlogiston’sprojectcausestemporaryexcesscapacity.Therefore,thepriceforthenexttwoyearsmustbesuchthattheexistingplant’sownerswillbeindifferentbetweenscrappingnowandscrappingattheendofyear2.Thisallowsustosolveforpriceinyears1and2.www.hackshp.cnToday’sscrapvalueis$60,000.Also,today’sscrapvalueisequaltothepresentvalueoffuturecashflows.Therefore:100,000×(Price−0.90)100,000×(Price−0.90)57,900++=60,000221.101.101.10Solving,wefindthatthepriceis$0.97perton.Knowingthis,wecancalculatethePVofPhlogiston’snewplant:⎡0.97−0.850.97−0.850.95−0.85⎤PV=100,000×⎢+2+2⎥=$103,471⎣1.101.100.10×1.10⎦100khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 2.Aircraftwillbedeployedinamannerthatwillminimizecosts.Thismeansthateachaircraftwillbeusedontherouteforwhichithasthegreatestcomparativeadvantage.Thus,forexample,forPart(a)ofthisproblem,itisclearthatRouteXwillbeservedwithfiveA’sandfiveB’s,andthatRouteYwillbeservedwithfiveB’sandfiveC’s.TheremainingC-typeaircraftwillbescrapped.Themaximumpricethatanyonewouldpayforanaircraftisthepresentvalueofthetotaladditionalcoststhatwouldbeincurredifthataircraftwerewithdrawnfromservice.Usingtheannuityfactorfor5timeperiodsat10percent,wefindthePVoftheoperatingcosts(allnumbersareinmillions):TypeXYA5.75.7khdaw.comB9.57.6C17.113.3Again,considerPart(a).ThecostofusinganA-typeaircraftonRouteX(Cost=PriceofA+5.7)mustbeequaltothecostofusingaB-typeaircraftonRouteX(Cost=PriceofB+9.5).Also,thecostofusingaB-typeaircraftonRouteY(PriceofB+7.6)equalsthecostofusingaC-typeonRouteY(PriceofC+13.3).Further,becausefiveC-typeaircraftarescrapped,thepriceofaC-typeaircraftmustbe$1.0,thescrapvalue.Therefore,solvingfirstforthepriceofBandthenforthepriceofA,wefindthatthepriceofanA-typeis$10.5andthepriceofaB-typeis$6.7.Usingthisapproach,wehavethefollowingsolutions:UsageAircraft课后答案网Value(inmillions)XYScrapABCa.5A+5B5B+5C5C$10.5$6.7$1.0b.10A10B10C10.56.71.0c.10A5A+5B5B+10C2.91.0www.hackshp.cn1.0d.10A10A10B+10C2.91.01.043.3358.333.a.PVof1−year−oldplant=+=$76.6221.201.2058.33PVof2−year−oldplant==$48.611.20101khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Giventhattheindustryiscompetitive,theinvestmentinanewplanttoproducebucolicacidmustyieldazeroNPV.First,wesolvefortherevenues(R)atwhichanewplanthaszeroNPV.01231.Initialinvestment-1002.Revenuesnetoftax0.6R0.6R0.6R3.Operatingcostsnetoftax-30-30-304.Depreciationtaxshield+405.Salvagevaluenetoftax+15Therefore:(0.6R−30+40)(0.6R−30)(0.6R−30+15)NPV=−100+++=0khdaw.com1.201.2021.2030=−100+1.264R−21.181R=$95.87Wecannowusethenewrevenuetore-computethepresentvaluesfromPart(a)above.(Recallthatexistingplantsmustusetheoriginaltaxdepreciationschedule.)40.9355.93PVof1−year−oldplant=+=$72.9521.201.2055.93PVof2−year课后答案网−oldplant==$46.611.20c.Existing2-year-oldplantshaveanet-of-taxsalvagevalueof:50–[(0.4)www.hackshp.cn×(50.0-33.3)]=$43.33d.SolveagainforrevenuesatwhichthenewplanthaszeroNPV:01231.Initialinvestment-1002.Revenues+R+R+R3.Operatingcosts-50-50-504.Salvagevalue+25(R−50)(R−50)(R−50+25)NPV=−100+++=0231.201.201.200=−100+2.106R−90.856R=$91102khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Withrevenuesof$91:4166PVof1−year−oldplant=+=$8021.201.2066PVof2−year−oldplant==$551.20khdaw.com课后答案网www.hackshp.cn103khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER12AgencyProblems,ManagementCompensation,andtheMeasurementofPerformanceAnswerstoPracticeQuestions1.Outlineofstepsincapitalbudgetingprocess:(1)Plantmanagergetsidea,doessomeveryroughestimates,anddetermineswhetherideaisworthpursuing.(2)Staffofplantmanagerdevelopsdetailedproposal,including:•Discussionofreasonthatthecompanyshouldinvestinthismachinekhdaw.com•Economicforecasts•Demandforecasts•Cashflowforecasts,bothrevenueandexpenses•Estimateofcostofcapital(unlessspecifiedatahigherlevel)•Netpresentvalueorinternalrateofreturncalculation(3)Proposalisevaluatedbydivisionlevelstaff.Ifapproved,proposalisevaluatedatcompanylevel.(4)Projectauthorizationisrequested,whichmayrequireafinalcheck/revisionofthenumbersintheoriginalproposal.(5)Purchaseandinstallationproceed.Iftherearesignificantcostoverruns,thesemustbere-approvedbythedivisionandcompanystaff.(6)Whenthemachineisupandrunning,sayafteroneyear,apostauditmightbeconductedtoevaluatetheentireprocess.课后答案网2.Thetypicalcompensationandincentiveplansfortopmanagementincludesalaryplusprofitsharingandstockoptions.Thiswww.hackshp.cnisusuallydonetoalignascloselyaspossibletheinterestsofthemanagerwiththeinterestsoftheshareholders.Thesemanagersareusuallyresponsibleforcorporatestrategyandpoliciesthatcandirectlyaffectthefutureoftheentirefirm.Plantanddivisionalmanagersareusuallypaidafixedsalaryplusabonusbasedonaccountingmeasuresofperformance.Thisisdonebecausetheyaredirectlyresponsibleforday-to-dayperformanceandthisvaluationmethodprovidesanabsolutestandardofperformance,asopposedtoastandardthatisrelativetoshareholderexpectations.Further,itallowsfortheevaluationofjuniormanagerswhoareonlyresponsibleforasmallsegmentofthetotalcorporateoperation.104khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.a.Whenpaidafixedsalarywithoutincentivestoactinshareholders’bestinterest,managersoftenactsub-optimally.1.Theymayreducetheireffortstofindandimplementprojectsthataddvalue.2.Theymayextractbenefits-in-kindfromthecorporationintheformofamorelavishoffice,ticketstosocialevents,overspendingonexpenseaccounts,etc.3.Theymayexpandthesizeoftheoperationjustfortheprestigeofrunningalargercompany.4.Theymaychoosesecond-bestinvestmentsinordertorewardexistingemployees,ratherthanthealternativethatrequiresoutsidepersonnelbuthasahigherNPV.khdaw.com5.Inordertomaintaintheircomfortablejobs,managersmayinvestinsaferratherthanriskierprojects.b.Tyingthemanager’scompensationtoEVAattemptstoensurethatassetsaredeployedefficientlyandthatearnedreturnsexceedthecostofcapital.Hence,actionstakenbythemanagertoshirkthedutyofmaximizingshareholderwealthgenerallyresultinareturnthatdoesnotexceedtheminimumrequiredrateofreturn(costofcapital).Themorethemanagerworksintheinterestsofshareholders,thegreatertheEVA.4.a.EVA=Incomeearned–(CostofcapitalxInvestment)=$8.03m–(0.09x$55.40m)=$3.04m课后答案网b.EVA=$8.03m–(0.09x$95m)=–$0.52mThemarketvalueoftheassetsshouldbeusedtocapturethetruewww.hackshp.cnopportunitycostofcapital.5.a.Ifafirmannouncesthehiringofanewmanagerwhoisexpectedtoincreasethefirm’svalue,thisinformationshouldbeimmediatelyreflectedinthestockprice.Ifthemanagerthenperformsasexpected,thereshouldnotbemuchchangeinthesharepricesincethisperformancehasalreadybeenincorporatedinthestockvalue.b.Thiscouldpotentiallybeaveryseriousproblemsincethemanagercouldlosemoneyforreasonsoutofhercontrol.Onesolutionmightbetoindexthepricechangesandthencomparetheactualrawmaterialpricepaidwiththeindexedvalue.Anotheralternativewouldbetocomparetheperformancewiththeperformanceofcompetitivefirms.105khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Itisnotnecessarilyanadvantagetohaveacompensationschemetiedtostockreturns.Forexample,inadditiontotheproblemofexpectationsdiscussedinPart(a),therearenumerousfactorsoutsidethemanager’scontrol,suchasfederalmonetarypolicyornewenvironmentalregulations.However,thestockpricedoestendtoincreaseordecreasedependingonwhetherthefirmdoesordoesnotexceedtherequiredcostofcapital.Tothisextent,itisameasureofperformance.6.EVA=Incomeearned–(CostofcapitalxInvestment)=$1.2m–[0.15x($4m+$2m+$8m)]=$1.2m–$2.1m=–$0.9m7.khdaw.coma.False.Thebiasesrarelywashout.Forexample,steadystateincomemaynotbemuchaffectedbyinvestmentsinR&Dbutbookassetvalueisunderstated.Thus,bookprofitabilityistoohigh,eveninthesteadystate.b.True.Allbiasesinbookprofitabilitycanbetracedtoaccountingrulesgoverningwhichassetsareputonthebalancesheetandthechoiceofbookdepreciationschedules.8.Theyear-by-yearbookandeconomicprofitabilityandratesofreturnarecalculatedinthetablebelow.(Weassumestraight-linedepreciation,$10peryearforyearsonethroughten).Becauseaplantlastsfor10years,‘steadystate’foramaturecompanyimpliesthat课后答案网weareoperatingtenplants,andeveryyearwecloseoneandbeginconstructiononanother.Thetotalbookincomeis$77.126,whichisthesameasthesumoftheBookIncomefiguresfromthetable(i.e.,thesumof–$30.0,–$21.934,$16.132,etc.).Similarly,thetotalbookinvestmentis$550.Thus,thesteadystatebookratewww.hackshp.cnofreturnforamaturecompanyproducingPolyzoneis:(77.126/550)=14.02%.Notethatthisisconsiderablydifferentfromtheeconomicrateofreturn,whichis8percent.012345Investment100.000000Depreciation10.00000010.00000010.00000010.00000010.000000BookValue-EndofYear90.00000080.00000070.00000060.00000050.000000NetRevenue0.0000000.00000038.06623076.13245376.13245376.132453ProductionCosts0.0000000.00000030.00000030.00000030.00000030.000000Transport&Other0.00000020.00000020.00000020.00000020.00000020.000000BookIncome-30.000000-21.93377016.13245316.13245316.132453BookRateofReturn-30.00%-24.37%20.17%23.05%26.89%CashFlow-100.000000-20.000000-11.93377026.13245326.13245326.132453PVStartofYear100.000002128.000002150.173772136.055221120.807186PVEndofYear128.000002150.173772136.055221120.807186104.339307ChangeinPV28.00000022.173770-14.118551-15.248035-16.467878EconomicDepreciation-28.000000-22.17377014.11855115.24803516.467878EconomicIncome8.00000010.24000012.01390210.8844189.664575EconomicRateofReturn8.00%8.00%8.00%8.00%8.00%106khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 678910InvestmentDepreciation10.00000010.00000010.00000010.00000010.000000BookValue-EndofYear40.00000030.00000020.00000010.0000000.000000NetRevenue76.13245376.13245376.13245376.13245376.132453ProductionCosts30.00000030.00000030.00000030.00000030.000000Transport&Other20.00000020.00000020.00000020.00000020.000000BookIncome16.13245316.13245316.13245316.13245316.132453BookRateofReturn32.26%40.33%53.77%80.66%161.32%CashFlow26.13245326.13245326.13245326.13245326.132453PVStartofYear104.33930786.55399967.34586646.60108224.196716PVEndofYear86.55399967.34586646.60108224.1967160.000000ChangeinPV-17.785308-19.208133-20.744784-22.404366-24.196716EconomicDepreciation17.78530819.20813320.74478422.404366EconomicIncomekhdaw.com8.3471456.9243205.3876693.7280871.935737EconomicRateofReturn8.00%8.00%8.00%8.00%8.00%9.a.Seetablebelow.Straight-linedepreciationwouldbe$166.67peryear.Hence,economicdepreciationinthiscaseisaccelerated,relativetostraight-linedepreciation.b.Thetruerateofreturnisfoundbydividingeconomicincomebythestart-of-periodpresentvalue.Asstatedinthetext,thiswillalwaysbe10percent.ThebookROIiscalculatedinPanelB(usingstraight-linedepreciation).课后答案网A.ForecastedEconomicIncomeandRateofReturnYear123456CashFlowwww.hackshp.cn298.0298.0298.0138.0138.0138.0PVatstartofyear998.9800.8582.9343.2239.5125.5PVatendofyear800.8582.9343.2239.5125.50.0ChangeinPV-198.1-217.9-239.7-103.7-114.0-125.5Economicdepreciation198.1217.9239.7103.7114.0125.5Economicincome99.980.158.334.324.012.5Rateofreturn0.100.100.100.100.100.10EVA0.00.00.00.00.00.0107khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com B.ForecastedBookIncomeandROIYear123456CashFlow298.00298.00298.00138.00138.00138.00BVatstartofyear1000.00833.33666.66500.00333.33166.66BVatendofyear833.33666.66500.00333.33166.660.00ChangeinBV-166.67-166.67-166.66-166.67-166.67-166.66Bookdepreciation166.67166.67166.66166.67166.67166.66Bookincome131.33131.33131.34-28.67-28.67-28.66BookROI0.1310.1580.197-0.057-0.086-0.172EVA31.33khdaw.com48.0064.67-78.67-62.00-45.3310.Fora10percentexpansioninbookinvestment,ROIforNodheadisgiveninthetablebelow.Whenthesteady-stategrowthrateisexactlyequaltotheeconomicrateofreturn(i.e.,10percent),theeconomicrateofreturnandbookROIarethesame.BookIncomeforAssetsPutinPlaceDuringYear1234561-6733831311311312课后答案网-7436911441443-81401001594-89441105-98486www.hackshp.cn-108TotalBookIncome:-67-4138173321484BookValueforAssetsPutinPlaceDuringYear123456110018346675003341672110191773455036731211100980760541332111088851466122161612TotalBookIncome:100119352795357542674866BookROI:-0.067-0.0210.0140.0480.0750.100**Thisisthesteadystaterateofreturn.11.Internetexercise;answerswillvary.108khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions.1.Year1Year2Year3CashFlow5.204.804.40PVatstartofyear1284PVatendofyear840ChangeinPV-4-4-4Economicdepreciation444khdaw.comEconomicincome1.200.800.40Economicrateofreturn0.100.100.10Bookdepreciation444Bookincome1.200.800.40Bookrateofreturn0.100.100.102.a.Seetableonnextpage.Notethateconomicdepreciationissimplythechangeinmarketvalue,whilebookdepreciation(peryear)is:[19.69课后答案网–(0.2×19.69)]/15=1.05Thus,economicdepreciationisacceleratedinthiscase,relativetobookdepreciation.www.hackshp.cnb.Seetableonnextpage.Notethatthebookrateofreturnexceedsthetruerateinonlythefirstyear.c.Becausetheeconomicreturnfrominvestinginoneairplaneis10percenteachyear,theeconomicreturnfrominvestinginafixednumberperyearisalso10percenteachyear.Inordertocalculatethebookreturn,assumethatweinvestinonenewairplaneeachyear(thenumberofairplanesdoesnotmatter,justsolongasitisthesameeachyear).Then,bookincomewillbe(3.67–1.05)=2.62fromtheairplaneinitsfirstyear,(3.00–1.95)=1.95fromtheairplaneinitssecondyear,etc.,foratotalbookincomeof15.21.Bookvalueiscalculatedsimilarly:19.69fortheairplanejustpurchased,18.64fortheairplanethatisoneyearold,etc.,foratotalbookvalueof185.10.Thus,thesteady-statebookrateofreturnis8.22percent,whichunderstatesthetrue(economic)rateofreturn(10percent).109khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Year12345678Marketvalue19.6917.9916.7915.7814.8914.0913.3612.68Economicdepreciation1.701.201.010.890.800.730.68Cashflow3.673.002.692.472.292.142.02Economicincome1.971.801.681.581.491.411.34Economicreturn10.0%10.0%10.0%10.0%10.0%10.0%10.0%Bookvalue19.6918.6417.5916.5415.4914.4413.3912.34Bookdepreciation1.051.051.051.051.051.051.05Bookincome2.621.951.641.421.241.090.97Bookreturnkhdaw.com13.3%10.5%9.3%8.6%8.0%7.5%7.2%Year910111213141516Marketvalue12.0511.4610.9110.399.919.449.018.59Economicdepreciation0.630.590.550.520.480.470.430.42Cashflow1.901.801.701.611.521.461.371.32Economicincome1.271.211.151.091.040.990.940.90Economicreturn10.0%10.0%10.0%10.0%10.0%10.0%10.0%10.0%Bookvalue11.29课后答案网10.249.198.147.096.044.993.94Bookdepreciation1.051.051.051.051.051.051.051.05Bookincome0.850.750.650.560.470.410.320.27Bookreturn6.9%6.6%6.3%6.1%5.8%5.8%5.3%5.4%www.hackshp.cn110khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER13CorporateFinancingandtheSixLessonsofMarketEfficiencyAnswerstoPracticeQuestions1.a.Anindividualcandocrazythings,butstillnotaffecttheefficiencyofmarkets.Thepriceoftheassetinanefficientmarketisaconsensuspriceaswellasamarginalprice.Anuttypersoncangiveassetsawayforfreeoroffertopaytwicethemarketvalue.However,whentheperson’ssupplyofassetsormoneyrunsout,thepricewilladjustbacktoitspriorlevel(assumingthereisnonew,relevantinformationreleasedbyhisaction).Ifyouareluckyenoughtoknowsuchaperson,youwillreceiveakhdaw.compositivegainatthenuttyinvestor’sexpense.Youhadbetternotcountonthishappeningveryoften,though.Fortunately,anefficientmarketprotectscrazyinvestorsincaseslessextremethantheabove.Eveniftheytradeinthemarketinan“irrational”manner,theycanbeassuredofgettingafairpricesincethepricereflectsallinformation.b.Yes,andhowmanypeoplehavedroppedabundle?Or,moretothepoint,howmanypeoplehavemadeabundleonlytoloseitlater?Peoplecanbeluckyandsomepeoplecanbeverylucky;efficientmarketsdonotprecludethispossibility.c.Investorpsychologyisaslipperyconcept,moreoftenthannotusedto课后答案网explainpricemovementsthattheindividualinvokingitcannotpersonallyexplain.Evenifitexists,isthereanywaytomakemoneyfromit?Ifinvestorpsychologydrivesupthepriceoneday,willitdosothenextdayalso?Orwillthepricedroptoa‘trwww.hackshp.cnue’level?Almostnoonecantellyoubeforehandwhat‘investorpsychology’willdo.Theoriesbasedonithavenocontent.d.Whatgoodisastablevaluewhenyoucan’tbuyorsellatthatvaluebecausenewconditionsorinformationhavedevelopedwhichmakethestablepriceobsolete?Itisthemarketprice,thepriceatwhichyoucanbuyorselltoday,whichdeterminesvalue.2.a.Thereisriskinalmosteverythingyoudoindailylife.Youcouldloseyourjoboryourspouse,orsufferdamagetoyourhousefromastorm.Thatdoesn’tnecessarilymeanyoushouldquityourjob,getadivorce,orsellyourhouse.Ifweacceptthatourworldisrisky,thenwemustacceptthatassetvaluesfluctuateasnewinformationemerges.Moreover,ifcapitalmarketsarefunctioningproperly,thenstockpricechangeswillfollowarandomwalk.Therandomwalkofvaluesistheresultofrationalinvestorscopingwithanuncertainworld.111khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Tomaketheexampleclearer,assumethateveryonebelievesinthesamechart.Whathappenswhenthechartshowsadownwardmovement?Areinvestorsgoingtobewillingtoholdthestockwhenithasanexpectedloss?Ofcoursenot.Theystartselling,andthepricewilldeclineuntilthestockisexpectedtogiveapositivereturn.Thetrendwill‘self-destruct.’c.Random-walktheoryasappliedtoefficientmarketsmeansthatfluctuationsfromtheexpectedoutcomearerandom.Supposethereisan80percentchanceofraintomorrow(becauseitrainedtoday).Thenthelocalumbrellastore’sstockpricewillrespondtodaytotheprospectofhighsalestomorrow.Thestore’ssaleswillnotfollowarandomwalk,butitsstockpricewill,becauseeachdaythestockpricereflectsallthatinvestorsknowaboutfutureweatherandfuturesales.khdaw.com3.Oneofthewaystothinkaboutmarketinefficiencyisthatitimpliesthereiseasymoneytobemade.Thefollowingappeartosuggestmarketinefficiency:(b)strongform(d)weakform(e)semi-strongform4.Theestimatesarefirstsubstitutedinthemarketmodel.Thentheresultfromthisexpectedreturnequationissubtractedfromtheactualreturnforthemonthtoobtaintheabnormalreturn.课后答案网Abnormalreturn(Intel)=Actualreturn–[1.54+(2.06×Marketreturn)]Abnormalreturn(Conagra)=Actualreturn–[0.98+(0.27×Marketreturn)]www.hackshp.cn5.OnepossibleprocedureistofirstformgroupsofstockswithsimilarP/Eratios,adjustingformarketrisk(usingeitherhistoricalestimatesofalphaorestimatesbasedontheCapitalAssetPricingModel).Thendeterminewhetherthealphaofeachgroupissignificantlydifferentfromzero.Herearesomethingstolookoutfor:a.Don’tselectsamplesofstockattheendoftheperiod.Youwillhaveomittedthecompaniesthatwentbankrupt.b.Includedividendsintheactualrateofreturn.LowP/Estockshavehighyields.c.CheckthatearningsareknownonthedatethatyoucalculateP/E.Stockswhoseearningssubsequentlyturnedouthighrelativetopricenaturallyperformbetter.d.Adjustforrisk.LowP/Estockstendtobemorerisky.e.YoumayneedtodisentangletheP/Eeffectfromothereffects,e.g.,sizeordividendyield.112khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.Theefficientmarkethypothesisdoesnotimplythatportfolioselectionshouldbedonewithapin.Themanagerstillhasthreeimportantjobstodo.First,shemustmakesurethattheportfolioiswelldiversified.Itshouldbenotedthatalargenumberofstocksisnotenoughtoensurediversification.Second,shemustmakesurethattheriskofthediversifiedportfolioisappropriateforthemanager’sclients.Third,shemightwanttotailortheportfoliototakeadvantageofspecialtaxlawsforpensionfunds.Theselawsmaymakeitpossibletoincreasetheexpectedreturnoftheportfoliowithoutincreasingrisk.7.Theyarebothundertheillusionthatmarketsarepredictableandtheyarewastingtheirtimetryingtoguessthemarket’sdirection.Rememberthefirstlessonofmarketefficiency:Marketshavenomemory.Thedecisionastowhenkhdaw.comtoissuestockshouldbemadewithoutreferenceto‘marketcycles.’8.Theefficient-markethypothesissaysthatthereisnoeasywaytomakemoney.Thus,whensuchanopportunityseemstopresentitself,weshouldbeveryskeptical.Forexample:°Inthecaseofshort-versuslong-termrates,andborrowingshort-termversuslong-term,therearedifferentrisksinvolved.Forexample,supposethatweneedthemoneylong-termbutweborrowshort-term.Whentheshort-termnoteisdue,wemustsomehowrefinance.However;thismaynotbepossible,ormaybepossibleonlyataveryhighinterestrate.°InthecaseofJapaneseversusUnitedStatesinterestrates,thereistherisk课后答案网thattheJapaneseyen-U.S.dollarexchangeratewillchangeduringtheperiodoftimeforwhichwehaveinvested.www.hackshp.cn9.Somekeypointsareasfollows:a.UnidentifiedRiskFactor:Fromaneconomicstandpoint,giventheinformationavailableandthenumberofparticipants,itishardtobelievethatanysecuritiesmarketintheU.Sisnotveryefficient.Thus,themostlikelyexplanationforthesmall-firmeffectisthatthemodelusedtoestimateexpectedreturnsisincorrect,andthatthereissomeas-yet-unidentifiedriskfactor.b.Coincidence:Instatisticalinference,weneverproveanaffirmativefact.Thebestwecandoistoacceptorrejectaspecifiedhypothesiswithagivendegreeofconfidence.Thus,nomatterwhattheoutcomeofastatisticaltest,thereisalwaysapossibility,howeverslight,thatthesmall-firmeffectissimplytheresultofstatisticalchanceor,inotherwords,acoincidence.113khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.MarketInefficiency:Onekeytomarketefficiencyisthehighlevelofcompetitionamongparticipantsinthemarket.Forsmallstocks,thelevelofcompetitionisrelativelylowbecausemajormarketparticipants(e.g.,mutualfundsandpensionfunds)arebiasedtowardholdingthesecuritiesoflarger,well-knowncompanies.Thus,itislikelythatthemarketforsmallstocksisfundamentallydifferentfromthemarketforlargerstocksand,hence,itisquiteplausiblethatthesmall-firmeffectissimplyareflectionofmarketinefficiency.10.Thereareseveralwaystoapproachthisproblem,butall(whendonecorrectly!)shouldgiveapproximatelythesameanswer.Wehavechosentousethekhdaw.comregressionanalysisfunctionofanelectronicspreadsheetprogramtocalculatethealphaandbetaforeachsecurity.Theregressionsareinthefollowingform:Securityreturn=alpha+(beta×marketreturn)+errortermTheresultsare:AlphaBetaExecutiveCheese-1.300.33PaddingtonBeer2.940.552(Asapointofinterest,theRfortheregressionsare0.067and0.069,respectively;thesevaluesarerelativelylowforaregressionofthistype.)TheabnormalreturnforExecutiveCheeseinMay2004was:–1.3–[–1.30+0.33课后答案网×(–1.3)]=0.429%ForPaddingtonBeer,theabnormalreturnwas:–7.1–[2.94+0.55×(–1.3)]=–9.325%www.hackshp.cnThus,theaverageabnormalreturnofthetwostocksduringthemonthofthedividendannouncementwas–4.448percent.11.Themarketismostlikelyefficient.ThegovernmentofKuwaitisnotlikelytohavenon-publicinformationabouttheBPshares.GoldmanSachsisprovidinganintermediaryserviceforwhichtheyshouldberemunerated.Stocksareboughtat(higher)askpricesandsoldat(lower)bidprices.Thespreadbetweenthetwo($0.11)isrevenueforthebroker.IntheU.S.,atthattime,abid-askspreadof1/8($0.125)wasnotuncommon.The‘profit’of$15millionreflectsthesizeoftheordermorethananymispricing.114khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.TheprobabilitythatmutualfundXachievedsuperiorperformanceinanyoneyearis0.50.TheprobabilitythatmutualfundXachievedsuperiorperformanceineachofthepasttenyearsis:100.5=0.00097656b.Theprobabilitythat,outof10,000mutualfunds,noneofthemobtainedtensuccessiveyearsofsuperiorperformanceis:10,000(1–0.00097656)=0.00005712khdaw.comTherefore,theprobabilitythatatleastoneofthe10,000mutualfundsobtainedtensuccessiveyearsofsuperiorperformanceis:1–0.00005712=0.999942882.No,thisdoesnotfollow.Thedeclineinpricesmerelyreflectstheconsensusmarketopinionabouttheseriousnessofthecountry’sdifficulties.Thestabilityaftertheannouncementreflectsthemarket’sopinionofthenatureoftheassistanceanditslikelihoodofsuccess.3.Internetexercise;answerswillvary.课后答案网www.hackshp.cn115khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER14AnOverviewofCorporateFinancingAnswerstoPracticeQuestions1.a.Parvalueis$0.05pershare,whichiscomputedasfollows:$435million/8,702millionsharesb.Thesharesweresoldatanaveragepriceof:[$435million+$64,693million]/8,702millionshares=$7.48khdaw.comc.Thecompanyhasrepurchased:8,702million–7,629million=1,073millionshares.d.Averagerepurchaseprice:$29,352million/1,073millionshares=$27.36pershare.e.Thevalueofthenetcommonequityis:$435million+$64,693million+$29,382million–$29,352million=$65,158million课后答案网2.Internetexercise;answerswillvary.3.a.ThedayafterthefoundingofInbox:www.hackshp.cnCommonshares($0.10parvalue)$50,000Additionalpaid-incapital1,950,000Retainedearnings0Treasurysharesatcost0Netcommonequity$2,000,000b.After2yearsofoperation:Commonshares($0.10parvalue)$50,000Additionalpaid-incapital1,950,000Retainedearnings120,000Treasurysharesatcost0Netcommonequity$2,120,000116khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.After3yearsofoperation:Commonshares($0.10parvalue)$150,000Additionalpaid-incapital6,850,000Retainedearnings370,000Treasurysharesatcost0Netcommonequity$7,370,0004.a.Commonshares($0.25parvalue)$120.5Additionalpaid-incapital1,864.5Retainedearnings4,433.0khdaw.comTreasuryshares(2,880.0)Otheradjustments(838.0)Netcommonequity$2,700.0b.Commonshares($0.25parvalue)$120.5Additionalpaid-incapital1,864.5Retainedearnings4,433.0Treasuryshares(3,580.0)Otheradjustments(838.0)Netcommonequity$2,000.0课后答案网5.Onewouldexpectthatthevotingshareshaveahigherpricebecausetheyhaveanaddedbenefit/responsibilitythathasvalue.www.hackshp.cn6.a.Grossprofits$760,000Interest100,000EBT$660,000Tax(at35%)231,000Fundsavailabletocommonshareholders$429,000b.Grossprofits(EBT)$760,000Tax(at35%)266,000Netincome$494,000Preferreddividend80,000Fundsavailabletocommonshareholders$414,000117khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 7.Internetexercise;answerswillvary.8.a.Lessvaluableb.Morevaluablec.Morevaluabled.Lessvaluablekhdaw.com课后答案网www.hackshp.cn118khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Formajorityvoting,youmustownorotherwisecontrolthevotesofasimplemajorityofthesharesoutstanding,i.e.,one-halfofthesharesoutstandingplusone.Here,with200,000sharesoutstanding,youmustcontrolthevotesof100,001shares.b.Withcumulativevoting,thedirectorsareelectedinorderofthetotalnumberofvoteseachreceives.With200,000sharesoutstandingandfivedirectorstobeelected,therewillbeatotalof1,000,000votescast.Toensureyoucanelectatleastonedirector,youmustensurethatsomeoneelsecanelectatmostfourdirectors.Thatis,youmusthaveenoughvoteskhdaw.comsothat,eveniftheotherssplittheirvotesevenlyamongfiveothercandidates,thenumberofvotesyourcandidategetswouldbehigherbyone.Letxbethenumberofvotescontrolledbyyou,sothatotherscontrol(1,000,000-x)votes.Toelectonedirector:,1000,000−xx=+15Solving,wefindx=166,666.8votes,or33,333.4shares.Becausetherearenofractionalshares,weneed33,334shares.课后答案网www.hackshp.cn119khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER15HowCorporationsIssueSecuritiesAnswerstoPracticeQuestions1.a.Zero-stagefinancingrepresentsthesavingsandpersonalloansthecompany’sprincipalsraisetostartafirm.First-stageandsecond-stagefinancingcomesfromfundsprovidedbyothers(oftenventurecapitalists)tosupplementthefounders’investment.b.Anafter-the-moneyvaluationrepresentstheestimatedvalueofthefirmafterthefirst-stagefinancinghasbeenreceived.khdaw.comc.Mezzaninefinancingcomesfromotherinvestors,afterthefinancingprovidedbyventurecapitalists.d.Aroadshowisapresentationaboutthefirmgiventopotentialinvestorsinordertogaugetheirreactionstoastockissueandtoestimatethedemandforthenewshares.e.Abesteffortsofferisanunderwriter’spromisetosellasmuchaspossibleofasecurityissue.f.Aqualifiedinstitutionalbuyerisalargefinancialinstitutionwhich,under课后答案网SECRule144A,isallowedtotradeunregisteredsecuritieswithotherqualifiedinstitutionalbuyers.g.Blue-skylawsarestatelawsgoverningthesaleofsecuritieswithinthewww.hackshp.cnstate.2.a.Management’swillingnesstoinvestinMarvin’sequitywasacrediblesignalbecausethemanagementteamstoodtoloseeverythingifthenewventurefailed,andthustheysignaledtheirseriousness.Byacceptingonlypartoftheventurecapitalthatwouldbeneeded,managementwasincreasingitsownriskandreducingthatofFirstMeriam.ThisdecisionwouldbecostlyandfoolishifMarvin’smanagementteamlackedconfidencethattheprojectwouldgetpastthefirststage.b.Marvin’smanagementagreednottoacceptlavishsalaries.Thecostofmanagementperkscomesoutoftheshareholders’pockets.InMarvin’scase,themanagersaretheshareholders.120khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.Ifheisbiddingonunder-pricedstocks,hewillreceiveonlyaportionofthesharesheappliesfor.Ifhebidsonunder-subscribedstocks,hewillreceivehisfullallotmentofshares,whichnooneelseiswillingtobuy.Hence,onaverage,thestocksmaybeunder-pricedbutoncetheweightingofallstocksisconsidered,itmaynotbeprofitable.4.Somepossiblereasonsforcostdifferences:a.Largeissueshavelowerproportionatecosts.b.Debtissueshavelowercoststhanequityissues.c.Initialpublicofferingsinvolvemoreriskforunderwritersthanissuesofseasonedstock.Underwritersdemandhigherspreadsincompensation.khdaw.com5.Thereareseveralpossiblereasonswhytheissuecostsfordebtarelowerthanthoseofequity,amongthem:°Thecostofcomplyingwithgovernmentregulationsmaybelowerfordebt.°Theriskofthesecurityislessfordebtandhencethepriceislessvolatile.Thisincreasestheprobabilitythattheissuewillbemis-pricedandthereforeincreasestheunderwriter’s.6.a.Inelasticdemandimpliesthatalargepricereductionisneededinordertoselladditionalshares.Thiswouldbethecaseonlyifinvestorsbelievethatastockhasnoclosesubstitutes(i.e.,theyvaluethestockforitsunique课后答案网properties).b.Pricepressuremaybeinconsistentwithmarketefficiency.Itimpliesthatthestockpricefallswhennewstockisissuedandsubsequentlyrecovers.www.hackshp.cnc.Ifacompany’sstockisundervalued,managerswillbereluctanttosellnewstock,evenifitmeansforegoingagoodinvestmentopportunity.Theconverseistrueifthestockisovervalued.Investorsknowthisand,therefore,markdownthepricewhencompaniesissuestock.(Ofcourse,managersofacompanywithundervaluedstockbecomeevenmorereluctanttoissuestockbecausetheiractionscanbemisinterpreted.)If(b)isthereasonforthepricefall,thereshouldbeasubsequentpricerecovery.If(a)isthereason,wewouldnotexpectapricerecovery,butthefallshouldbegreaterforlargeissues.If(c)isthereason,thepricefallwilldependonlyonissuesize(assumingtheinformationiscorrelatedwithissuesize).121khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 7.a.Example:Beforeissue,thereare100sharesoutstandingat$10pershare.Thecompanysells20sharesforcashat$5pershare.Companyvalueincreasesby:(20x$5)=$100.Thus,afterissue,eachshareisworth:(100×$10)+$100$1,100==$9.17100+20120Notethatnewshareholdersgain:(20×$4.17)=$83.Oldshareholderslose:(100×$0.83)=$83.b.Example:Beforeissue,thereare100sharesoutstandingat$10pershare.Thecompanymakesarightsissueof20sharesat$5pershare.khdaw.comEachrightisworth:(rightsonprice)−(issueprice)10−5Valueofright===$0.83N+16Thenewsharepriceis$9.17.Ifashareholdersellshisright,hereceives$0.83cashandthevalueofeachsharedeclinesby$10-$9.17=$0.83.Theshareholder’stotalwealthisunaffected.8.a.5×(10,000,000/4)=$12.5million(rightsonprice)−(issueprice)6−5b.Valueofright课后答案网===$0.20N+14+1(10,000,000×$6)+$12,500,000c.Stockprice==$5.80www.hackshp.cn10,000,000+2,500,000Astockholderwhopreviouslyownedfourshareshadstockswithavalueof:(4×$6)=$24.Thisstockholderhasnowpaid$5forafifthsharesothatthetotalvalueis:($24+$5)=$29.Thisstockholdernowownsfiveshareswithavalueof:(5×$5.80)=$29,sothatsheisnobetterorworseoffthanshewasbefore.d.Thesharepricewouldhavetofalltotheissuepricepershare,or$5pershare.Firmvaluewouldthenbe:(10million×$5)=$50million122khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.$12,500,000/$4=3,125,000shares$10,000,000/3,125,000=3.20rightspershare(rightsonprice)−(issueprice)6−4Valueofright===$0.48N+13.2+1(10,000,000×$6)+$12,500,000Stockprice==$5.5210,000,000+3,125,000Astockholderwhopreviouslyowned3.2shareshadstockswithavalueof:(3.2×$6)=$19.20.Thisstockholderhasnowpaid$4foranadditionalshare,sothatthetotalvalueis:($19.20+$4)=$23.20.Thisstockholdernowowns4.2khdaw.comshareswithavalueof:(4.2×$5.52)=$23.18(differenceduetorounding).课后答案网www.hackshp.cn123khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Venturecapitalcompaniesprefertoadvancemoneyinstagesbecausethisapproachprovidesanincentiveformanagementtoreachthenextstage,anditallowsFirstMeriamtocheckateachstagewhethertheprojectcontinuestohaveapositiveNPV.Marvinishappybecauseitsignalstheirconfidence.Withhindsight,FirstMeriamlosesbecauseithastopaymoreforthesharesateachstage.b.Theproblemwiththisarrangementwouldbethat,whileMarvinwouldhaveanincentivetoensurethattheoptionwasexercised,itwouldnothavetheincentivetomaximizethepriceatwhichitsellsthenewshares.khdaw.comc.TherightoffirstrefusalcouldmakesenseifFirstMeriamwasmakingalargeup-frontinvestmentthatitneededtobeabletorecaptureinitssubsequentinvestments.Inpractice,MarvinislikelytogetthebestdealfromFirstMeriam.2.Inauniform-priceauction,allsuccessfulbidderspaythesameprice.Inadiscriminatoryauction,eachsuccessfulbidderpaysapriceequaltohisownbid.Auniform-priceauctionprovidesforthepoolingofinformationfrombiddersandreducesthewinner’scurse.课后答案网3.PisaConstruction’sreturnoninvestmentis8%,whereasinvestorsrequirea10%rateofreturn.Pisaproposesascenarioinwhich2,000sharesofcommonstockareissuedat$40pershare,andtheproceeds($80,000)aretheninvestedat8%.Assumingthatthe8%returnisreceivedintheformofaperpetuity,thentheNPVwww.hackshp.cnforthisscenarioiscomputedasfollows:–$80,000+(0.08×$80,000)/0.10=–$16,000Sharepricewoulddeclineasaresultofthisproject,notbecausethecompanysellssharesforlessthanbookvalue,butratherduetothefactthattheNPVisnegative.Notethat,ifinvestorsknowpricewilldeclineasaconsequenceofPisa’sundertakinganegativeNPVinvestment,Pisawillnotbeabletosellsharesat$40pershare.Rather,aftertheannouncementoftheproject,thesharepricewilldeclineto:($400,000-$16,000)/10,000=$38.40Therefore,Pisawillhavetoissue($80,000/$38.40)=2,083newshares.Onecanshowthat,iftheproceedsofthestockissueareinvestedat10%,thensharepriceremainsunchanged.124khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER16PayoutPolicyAnswerstoPracticeQuestions1.Newspaperexercise;answerswillvarydependingonthestockschosen.2.a.Distributesarelativelylowproportionofcurrentearningstooffsetfluctuationsinoperationalcashflow;lowerP/Eratio.b.Distributesarelativelyhighproportionofcurrentearningssincethekhdaw.comdeclineisunexpected;higherP/Eratio.c.Distributesarelativelylowproportionofcurrentearningsinordertooffsetanticipateddeclinesinearnings;lowerP/Eratio.d.Distributesarelativelylowproportionofcurrentearningsinordertofundexpectedgrowth;higherP/Eratio.3.a.At=0eachshareisworth$20.Thisvalueisbasedontheexpectedstreamofdividends:$1att=1,andincreasingby5%ineachsubsequentyear.Thus,wecanfindtheappropriate课后答案网discountrateforthiscompanyasfollows:DIV1P=0r−gwww.hackshp.cn1$20=⇒r=0.10=10.0%r−.005Beginningatt=2,eachshareinthecompanywillenjoyaperpetualstreamofgrowingdividends:$1.05att=2,andincreasingby5%ineachsubsequentyear.Thus,thetotalvalueofthesharesatt=1(afterthet=1dividendispaidandafterNnewshareshavebeenissued)isgivenby:$1.05millionV==$21million10.10−0.05IfP1isthepricepershareatt=1,then:V1=P1×(1,000,000+N)=$21,000,000and:P1×N=$1,000,000125khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Fromthefirstequation:(1,000,000×P1)+(N×P1)=$21,000,000Substitutingfromthesecondequation:(1,000,000×P1)+$1,000,000=$21,000,000sothatP1=$20.00b.WithP1equalto$20,and$1,000,000toraise,thefirmwillsell50,000newshares.c.Theexpecteddividendspaidatt=2are$1,050,000,increasingby5%inkhdaw.comeachsubsequentyear.With1,050,000sharesoutstanding,dividendspershareare:$1att=2,increasingby5%ineachsubsequentyear.Thus,totaldividendspaidtooldshareholdersare:$1,000,000att=2,increasingby5%ineachsubsequentyear.d.Forthecurrentshareholders:$2,000,000$1,000,000PV(t=0)=+=$20,000,0001.10(0.10−0.05)×(1.10)4.FromQuestion3,thefairissuepriceis$20pershare.Ifthesesharesareinsteadissuedat$10pershare,thenthenewshareholdersaregettingabargain,课后答案网i.e.,thenewshareholderswinandtheoldshareholderslose.Aspointedoutinthetext,anyincreaseincashdividendmustbeoffsetbyastockissueifthefirm’sinvestmentandborrowingpoliciesaretobeheldconstant.Ifthisstockissuecannotbemadeatafairprice,thenshareholdersareclearlywww.hackshp.cnnotindifferenttodividendpolicy.5.Theriskstemsfromthedecisiontonotinvest,anditisnotaresultoftheformoffinancing.Ifaninvestorconsumesthedividendinsteadofre-investingthedividendinthecompany’sstock,sheisalso‘selling’apartofherstakeinthecompany.Inthisscenario,shewillsufferanequalopportunitylossifthestockpricesubsequentlyrisessharply.126khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.Ifthecompanydoesnotpayadividend:Cash00DebtExistingfixedassets4,5005,500+NPVEquityNewproject1,000+NPV$5,500+NPV$5,500+NPVIfthecompanypaysa$1,000dividend:Cash00DebtExistingfixedassets4,5001,000ValueofnewstockNewproject1,000+NPV4,500+NPVValueoforiginalstockkhdaw.com$5,500+NPV$5,500+NPVBecausethenewstockholdersreceivestockworth$1,000,thevalueoftheoriginalstockdeclinesby$1,000,whichexactlyoffsetsthedividends.7.Oneproblemwiththisanalysisisthatitassumesthecompany’snetprofitremainsconstanteventhoughtheassetbaseofthecompanyshrinksby20%.Thatis,inordertoraisethecashnecessarytorepurchasetheshares,thecompanymustsellassets.Iftheassetssoldarerepresentativeofthecompanyasawhole,wewouldexpectnetprofittodecreaseby20%sothatearningspershareandtheP/Eratioremainthesame.Aftertherepurchase,thecompanywill课后答案网looklikethisnextyear:Netprofit:$8millionNumberofshares:0.8millionEarningspershare:www.hackshp.cn$10Price-earningsratio:20Shareprice:$2008.a.Ifweignoretaxesandthereisnoinformationconveyedbytherepurchasewhentherepurchaseprogramisannounced,thensharepricewillremainat$80.b.Theregulardividendhasbeen$4pershare,andsothecompanyhas$400,000cashonhand.Sincethesharepriceis$80,thecompanywillrepurchase5,000shares.127khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Totalassetvalue(beforeeachdividendpaymentorstockrepurchase)remainsat$8,000,000.Theseassetsearn$400,000peryear,undereitherpolicy.OldPolicy:Theannualdividendis$4,whichneverchanges,sothestockprice(immediatelypriortothedividendpayment)willbe$80inallyears.NewPolicy:Everyyear,$400,000isavailableforsharerepurchase.Asnotedabove,5,000shareswillberepurchasedatt=0.Att=1,immediatelypriortotherepurchase,therewillbe95,000sharesoutstanding.Theseshareswillbeworth$8,000,000,or$84.21pershare.With$400,000availabletorepurchaseshares,thetotalnumberofsharesrepurchasedwillbe4,750.Usingthisreasoning,wecangeneratethekhdaw.comfollowingtable:TimeSharesShareSharesOutstandingPriceRepurchasedt=0100,000$80.005,000t=195,000$84.214,750t=290,250$88.644,513t=385,737$93.314,287Notethatthestockpriceisincreasingby5.26%eachyear.Thisisconsistentwiththerateofreturntotheshareholdersundertheoldpolicy,wherebyeveryyearassetsworth$7,600,000(theassetvalueimmediatelyafterthedividend)earn$400,000,orareturnof5.26%.课后答案网9.Ifmarketsareefficient,thenasharerepurchaseisazero-NPVinvestment.Supposethatthetrade-offisbetweenaninvestmentinrealassetsorasharerepurchase.Obviously,theshareholderswww.hackshp.cnwouldpreferasharerepurchasetoanegative-NPVproject.Thequotedstatementseemstoimplythatfirmshaveonlynegative-NPVprojectsavailable.Anotherpossibleinterpretationisthatmanagershaveinsideinformationindicatingthatthefirm’sstockpriceistoolow.Inthiscase,sharerepurchaseisdetrimentaltothosestockholderswhosellandbeneficialtothosewhodonot.Itisdifficulttoseehowthiscouldbebeneficialtothefirm,however.128khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10.a.Thisstatementimplicitlyequatesthecostofequitycapitalwiththestock’sdividendyield.Ifthisweretrue,companiesthatpaynodividendwouldhaveazerocostofequitycapital,whichisclearlynotcorrect.b.Onewaytothinkofretainedearningsisthat,fromaneconomicstandpoint,thecompanyearnsmoneyonbehalfoftheshareholders,whothenimmediatelyre-investtheearningsinthecompany.Thus,retainedearningsdonotrepresentfreecapital.Retainedearningscarrythefullcostofequitycapital(althoughissuecostsassociatedwithraisingnewequitycapitalareavoided).c.Ifthetaxoncapitalgainsislessthanthatondividends,theconclusionofkhdaw.comthisstatementiscorrect;i.e.,astockrepurchaseisalwayspreferredoverdividends.Thisconclusion,however,isstrictlybecauseoftaxes.Earningspershareisirrelevant.11.a.Becausethisisaregulardividend,theannouncementisnotnewstothestockmarket.Hence,thestockpricewilladjustonlywhenthestockbeginstotradewithoutthedividendand,thus,thestockpricewillfallontheex-dividenddate.b.Withnotaxes,thestockpricewillfallbytheamountofthedividend,here$1.课后答案网c.Withtaxesondividendsbutnotaxesoncapitalgains,investorswillrequirethesameafter-taxreturnfromtwocomparablecompanies,oneofwhichpaysadividend,theother,acapitalgainofthesamemagnitude.Thestockpricewillthusfallbytheamountoftheafter-taxdividend,here:www.hackshp.cn$1×(1-0.30)=$0.70.d.Ifdealersaretaxedequallyoncapitalgainsanddividends,thentheyshouldnotdemandanyextrareturnforholdingstocksthatpaydividends.Thus,ifshareholdersareabletofreelytradesecuritiesaroundthetimeofthedividendpayment,thereshouldbenotaxeffectsassociatedwithdividends.129khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 12.a.Ifyouown100sharesat$100pershare,thenyourwealthis$10,000.Afterthedividendpayment,eachsharewillbeworth$99andyourtotalwealthwillbethesame:100sharesat$99pershareplus$100individends,or$10,000.b.Withnotaxes,itdoesnotmatterhowthecompanytransferswealthtotheshareholders;thatis,youareindifferentbetweenadividendandasharerepurchaseprogram.Ineithercase,yourtotalwealthwillremainat$10,000.13.After-taxReturnonShareA:Att=1,ashareholderincompanyAwillreceiveadividendof$10,whichissubjecttotaxesof30%.Therefore,theafter-taxgainiskhdaw.com$7.Sincetheinitialinvestmentis$100,theafter-taxrateofreturnis7%.After-taxReturnonShareB:IfaninvestorsellsshareBafter2years,theprice2willbe:(100×1.10)=$121.Thecapitalgainof$21istaxedatthe30%rate,andsotheafter-taxgainis$14.70.Onaninitialinvestmentof$100,overa2-yeartimeperiod,thisisanafter-taxannualrateofreturnof7.10%.IfaninvestorsellsshareBafter10years,thepricewillbe:10(100×1.10)=$259.37.Thecapitalgainof$159.37istaxedatthe30%rate,andsotheafter-taxgainis$111.56.Onaninitialinvestmentof$100,overa10-yeartimeperiod,thisisanafter-taxannualrateofreturnof7.78%.14.a.(i)Thetax-freeinvestorshouldbuyonthewith-dividenddatebecausethe课后答案网dividendisworth$1andthepricedecreaseisonly$0.90.(ii)Thedividendisworthonly$0.60tothetaxableinvestorwhoissubjecttoa40%marginaltaxrate.Therefore,thisinvestorshouldbuyontheex-dividenddate.www.hackshp.cn[Actually,thetaxableinvestor’sproblemisalittlemorecomplicated.Bybuyingattheex-dividendprice,thisinvestorincreasesthecapitalgainthatiseventuallyreporteduponthesaleoftheasset.Atmost,however,thiswillcost:(0.16×0.90)=$0.14Thisisnotenoughtooffsetthetaxonthedividend.]b.Themarginalinvestor,bydefinition,mustbeindifferentbetweenbuyingwith-dividendorex-dividend.IfweletTrepresentthemarginaltaxrateondividends,thenthemarginaltaxrateoncapitalgainsis(0.4T).Inorderforthenetextrareturnfrombuyingwith-dividend(insteadofex-dividend)tobezero:–Extrainvestment+After-taxdividend+Reductionincapitalgainstax=0Therefore,perdollarofdividend:–0.85+[(1–T)×1.00]+[0.4T×0.85]=0T=0.227=22.7%130khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Wewouldexpectthehigh-payoutstockstoshowthelargestdeclineperdollarofdividendspaidbecausethesestocksshouldbeheldbyinvestorsinlow,orperhapsevenzero,marginaltaxbrackets.d.Someinvestors(e.g.,pensionfundsandsecuritydealers)areindifferentbetween$1ofdividendsand$1ofcapitalgains.Theseinvestorsshouldbepreparedtobuyanyamountofstockwith-dividendaslongasthefall-offinpriceisfractionallylessthanthedividend.EltonandGruber’sresultsuggeststhattheremustbesomeimpedimenttosuchtaxarbitrage(e.g.,transactionscostsorIRSrestrictions).But,inthatcase,itisdifficulttointerprettheirresultasindicativeofmarginaltaxrates.khdaw.come.Thetaxadvantagetocapitalgainshasbeenreduced.Ifinvestorsarenowindifferentbetweendividendsandcapitalgains,wewouldexpectthatthepaymentofa$1dividendwouldresultina$1decreaseinprice.15.Evenifthemiddle-of-the-roadpartyiscorrectaboutthesupplyofdividends,westilldonotknowwhyinvestorswantedthedividendstheygot.So,itisdifficulttobesureabouttheeffectofthetaxchange.Ifthereissomenon-taxadvantagetodividendsthatoffsetstheapparenttaxdisadvantage,thenwewouldexpectinvestorstodemandmoredividendsafterthegovernmentreducesthetaxrateondividends.Iftheapparenttaxdisadvantagewereirrelevantbecausethereweretoomanyloopholesinthetaxsystem,thenthereductioninthetaxrateondividendswouldnotaffectthedemandfordividends.Inanycase,themiddle-of-课后答案网the-roaderswouldarguethatoncecompaniesadjustedthesupplyofdividendstothenewequilibrium,dividendpolicywouldagainbecomeirrelevant.www.hackshp.cn131khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Reducingtheamountofearningsretainedeachyearwill,ofcourse,reducethegrowthrateofdividends.Also,thefirmwillhavetoissuenewshareseachyearinordertofinancecompanygrowth.Undertheoriginaldividendpolicy,weexpectnextyear’sstockpricetobe:($50×1.08)=$54.IfNisthenumberofsharespreviouslyoutstanding,thevalueofthecompanyatt=1is(54N).Underthenewpolicy,nnewshareswillbeissuedatt=1tomakeupforthereductioninretainedearningsresultingfromthenewpolicy.Thisdecreaseis:($4-$2)=$2peroriginalshare,oranaggregatereductionof2N.IfP1isthepriceofthecommonstockatt=1underthenewpolicy,then:khdaw.com2N=nP1Also,becausethetotalvalueofthecompanyisunchanged:54N=(N+n)P1Solving,wefindthatP1=$52.IfgistheexpectedgrowthrateunderthenewpolicyandP0thepriceatt=0,wehave:52=(1+g)P0and:4课后答案网P=00.12−gSubstitutingthesecondequationaboveforP0inthefirstequationandthensolving,wefindthatg=4%andPwww.hackshp.cn0=$50,sothatthecurrentstockpriceisunchanged.132khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 2.Assumethatalltaxpayerspaya20%taxondividendincomeand10%taxoncapitalgains.FirmApaysnodividendsbutinvestorsexpectthepriceofFirmAstocktoincreasefrom$40to$50pershare.FirmBpaysadividendof$5pershareandinvestorsexpectthepriceofFirmBstocktobe$45nextyear.ResultsforFirmAare:Before-taxrateofreturn$10/$40=25.00%Taxondividendat20%$0.00Taxoncapitalgainsat10%0.10×$10.00=$1.00Totalafter-taxincome$0+$10-$1=$9.00(dividendspluscapitalgainslesstaxes)After-taxrateofreturn$9/$40=22.50%khdaw.comThepriceofFirmBstocktodaymustadjustsoastoprovideanafter-taxreturnequaltothatofFirmA.LetXequalthecurrentpriceofFirmBstock.Then,forFirmB:Nextyear’sprice$45.00Dividend$5.00Today’sstockpriceXCapitalgain$45–XBefore-taxrateofreturn[$5+($45–X)]/XTaxondividendat20%0.20×$5.00=$1.00Taxoncapitalgainsat10%0.10×($45–X)Totalafter-taxincome[$5+($45–X)]–[$1+0.10×($45–X)](dividendspluscapitalgainslesstaxes)课后答案网ThepriceofFirmBstockadjustssothattheafter-taxrateofreturnforFirmBisequalto22.5%,theafter-taxrateofreturnforFirmA.Tofindtoday’spriceforFirmAstock,solvethefollowingforX:[$5+($45-X)]www.hackshp.cn-{}$1+[0.10×($45-X)]=0.225⇒X=$39.56X3.Itistruethatresearchershavebeenconsistentinfindingapositiveassociationbetweenprice-earningsmultiplesandpayoutratios.Butsimpletestslikethisonedonotisolatetheeffectsofdividendpolicy,sotheevidenceisnotconvincing.SupposethatKingCoalCompany,whichcustomarilydistributeshalfitsearnings,suffersastrikethatcutsearningsinhalf.Thesetbackisregardedastemporary,however,somanagementmaintainsthenormaldividend.Thepayoutratioforthatyearturnsouttobe100percent,not50percent.133khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ThetemporaryearningsdropalsoaffectsKingCoal’sprice-earningsratio.Thestockpricemaydropbecauseofthisyear’sdisappointingearnings,butitdoesnotdroptoone-halfitspre-strikevalue.Investorsrecognizethestrikeastemporary,andtheratioofpricetothisyear’searningsincreases.Thus,KingCoal’slabortroublescreatebothahighpayoutratioandahighprice-earningsratio.Inotherwords,theycreateaspuriousassociationbetweendividendpolicyandmarketvalue.Thesamethinghappenswheneverafirmencounterstemporarygoodfortune,orwheneverreportedearningsunderestimateoroverestimatethetruelong-runearningsonwhichbothdividendsandstockpricesarebased.Asecondsourceoferrorisomissionofotherfactorsaffectingboththefirm’sdividendpolicyanditsmarketvaluation.Forexample,weknowthatfirmsseekkhdaw.comtomaintainstabledividendrates.Companieswhoseprospectsareuncertainthereforetendtobeconservativeintheirdividendpolicies.Investorsarealsolikelytobeconcernedaboutsuchuncertainty,sothatthestocksofsuchcompaniesarelikelytosellatlowmultiples.Again,theresultisanassociationbetweenthepriceofthestockandthepayoutratio,butitstemsfromthecommonassociationwithriskandnotfromamarketpreferencefordividends.Anotherreasonthatearningsmultiplesmaybedifferentforhigh-payoutandlow-payoutstocksisthatthetwogroupsmayhavedifferentgrowthprospects.Suppose,ashassometimesbeensuggested,thatmanagementiscarelessintheuseofretainedearningsbutexercisesappropriatelystringentcriteriawhenspendingexternalfunds.Undersuchcircumstances,investorswouldbecorrecttovaluestocksofhigh-payoutfirmsmorehighly.Butthereasonwouldbethat课后答案网thecompanieshavedifferentinvestmentpolicies.Itwouldnotreflectapreferenceforhighdividendsassuch,andnocompanycouldachievealastingimprovementinitsmarketvaluesimplybyincreasingitspayoutratio.www.hackshp.cn4.a.Themarginalinvestorsaretheinstitutions.$20b.Priceoflow-payoutstock:P==$166.6700.12$10Priceofmedium-payoutstock:P==$83.3300.12$30Priceofhigh-payoutstock:P==$250.0000.12134khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Forcorporations,after-taxreturnis12%foreachtypeofstock.Forindividuals,after-taxreturnsare:(0.50×$5)+(0.85×$15)Forlow-payoutstock:=9.15%$166.67(0.50×$5)+(0.85×$5)Formedium-payoutstock:=8.10%$83.33(0.50×$30)+(0.85×$0)Forhigh-payoutstock:=6.00%$250.00khdaw.comForcorporations,after-taxreturnsare:(0.95×$5)+(0.65×$15)Forlow-payoutstock:=8.70%$166.67(0.95×$5)+(0.65×$5)Formedium-payoutstock:=9.60%$83.33(0.95×$30)+(0.65×$0)Forhigh-payoutstock:=11.40%$250.00d.Low课后答案网MediumHighPayoutPayoutPayoutIndividuals$80billionCorporations$10billionInstitutionswww.hackshp.cn$20billion$50billion$110billion135khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER17DoesDebtPolicyMatter?AnswerstoPracticeQuestions1.a.Thetwofirmshaveequalvalue;letVrepresentthetotalvalueofthefirm.RosencrantzcouldbuyonepercentofCompanyB’sequityandborrowanamountequalto:0.01×(DA-DB)=0.002VThisinvestmentrequiresanetcashoutlayof(0.007V)andprovidesanetkhdaw.comcashreturnof:(0.01×Profits)–(0.003×rf×V)whererfistherisk-freerateofinterestondebt.Thus,thetwoinvestmentsareidentical.b.GuildensterncouldbuytwopercentofCompanyA’sequityandlendanamountequalto:0.02×(DA-DB)=0.004VThisinvestmentrequiresanetcashoutlayof(0.018V)andprovidesanetcashreturnof:(0.02课后答案网×Profits)–(0.002×rf×V)Thusthetwoinvestmentsareidentical.c.TheexpecteddollarreturntoRosencrantz’originalinvestmentinAis:www.hackshp.cn(0.01×C)–(0.003×rf×VA)whereCistheexpectedprofit(cashflow)generatedbythefirm’sassets.Sincethefirmsarethesameexceptforcapitalstructure,CmustalsobetheexpectedcashflowforFirmB.ThedollarreturntoRosencrantz’alternativestrategyis:(0.01×C)–(0.003×rf×VB)Also,thecostoftheoriginalstrategyis(0.007VA)whilethecostofthealternativestrategyis(0.007VB).IfVAislessthanVB,thentheoriginalstrategyofinvestinginCompanyAwouldprovidealargerdollarreturnatthesametimethatitwouldcostlessthanthealternative.Thus,norationalinvestorwouldinvestinCompanyBifthevalueofCompanyAwerelessthanthatofCompanyB.136khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 2.Whenafirmissuesdebt,itshiftsitscashflowintotwostreams.MM’sPropositionIstatesthatthisdoesnotaffectfirmvalueiftheinvestorcanreconstituteafirm’scashflowstreambycreatingpersonalleverageorbyundoingtheeffectofthefirm’sleveragebyinvestinginbothdebtandequity.ItissimilarwithCarruther’scows.Ifthecreamandskimmilkgointothesamepail,thecowshavenospecialvalue.(Ifaninvestorholdsboththedebtandequity,thefirmdoesnotaddvaluebysplittingthecashflowsintothetwostreams.)Inthesamevein,thecowshavenospecialvalueifadairycancostlesslysplitupwholemilkintocreamandskimmilk.(Firmborrowingdoesnotaddvalueifinvestorscanborrowontheirownaccount.)Carruther’scowswillhaveextravalueifconsumerswantcreamandskimmilkandifthedairycannotsplitupwholemilk,orifitiscostlytodoso.khdaw.com3.a.Themarketpriceofthestockisnotaffectedbytheannouncement.b.Sincethemarketpriceofthesharesis$10,thecompanycanbuyback:$160million/$10=16millionsharesc.Afterthechangeincapitalstructure,themarketvalueofthefirmisunchanged:Equity+Debt=(9million×$10)+$160million=$250milliond.Afterthechangeinstructure,thedebtratiois:课后答案网Debt/(Debt+Equity)=$160million/$250million=0.64e.Noonegainsorloses.(Seetheanswertothenextquestion.)www.hackshp.cn4.a.Themarketvalueofthefirm’sequityincreasesby$30million,theamountofthedecreaseinthemarketvalueofthefirm’sexistingdebt.Therefore,thepriceofthestockincreasesto:($150million+$30million)/15millionshares=$12b.Sincethemarketpriceofthesharesis$12,thecompanycanbuyback:$60million/$12=5millionsharesc.Afterthechangeincapitalstructure,themarketvalueofthefirmisunchanged:Equity+Debt=(10million×$12)+$130million=$250milliond.Afterthechangeinstructure,thedebtratiois:Debt/(Debt+Equity)=$130million/$250million=0.52137khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com e.Theinvestorsintheexistingdebtlose$30millionwhiletheshareholdersgainthis$30million.Thevalueofeachshareincreasesby:$30million/15millionshares=$25.Thecompanycostofcapitalis:rA=(0.8×0.12)+(0.2×0.06)=0.108=10.8%UnderPropositionI,thisisunaffectedbycapitalstructurechanges.Withthebondsremainingatthe6percentdefault-riskfreerate,wehave:Debt-EquityrErAkhdaw.comRatio0.000.1080.1080.100.1130.1080.500.1320.1081.000.1560.1082.000.2040.1083.000.2520.108Seefigureonnextpage.6.Thisisnotavalidobjection.MM’sPropositionIIexplicitlyallowsfortheratesofreturnforbothdebtandequitytoincreaseastheproportionofdebtinthecapital课后答案网structureincreases.Theratefordebtincreasesbecausethedebt-holdersaretakingonmoreoftheriskofthefirm;therateforcommonstockincreasesbecauseofincreasingfinancialleverage.SeeFigure17.2andtheaccompanyingdiscussion.www.hackshp.cn138khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com RatesofReturnrE.250khdaw.com.200.150.108rA课后答案网.060rDwww.hackshp.cnDebt/Equity123139khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 7.a.UnderPropositionI,thefirm’scostofcapital(rA)isnotaffectedbythechoiceofcapitalstructure.Thereasonthequotedstatementseemstobetrueisthatitdoesnotaccountforthechangingproportionsofthefirmfinancedbydebtandequity.Asthedebt-equityratioincreases,itistruethatboththecostofequityandthecostofdebtincrease,butasmallerproportionofthefirmisfinancedbyequity.Theoveralleffectistoleavethefirm’scostofcapitalunchanged.b.Moderateborrowingdoesnotsignificantlyaffecttheprobabilityoffinancialdistress,butitdoesincreasethevariability(andmarketrisk)bornebystockholders.Thisadditionalriskmustbeoffsetbyahigheraveragereturntostockholders.khdaw.com8.a.Iftheopportunitywerethefirm’sonlyasset,thiswouldbeagooddeal.Stockholderswouldputupnomoneyand,therefore,wouldhavenothingtolose.However,rationallenderswillnotadvance100percentoftheasset’svalueforan8percentpromisedreturnunlessotherassetsareputupascollateral.Sometimesfirmsfinditconvenienttoborrowallthecashrequiredforaparticularinvestment.Suchinvestmentsdonotsupportalloftheadditionaldebt;lendersareprotectedbythefirm’sotherassetstoo.Inanycase,iffirmvalueisindependentofleverage,thenanyasset’scontributiontofirmvaluemustbeindependentofhowitisfinanced.Note课后答案网alsothatthestatementignorestheeffectonthestockholdersofanincreaseinfinancialleverage.b.Thisisnotanimportantreasonforconservativedebtlevels.SolongasMM’sPropositionIholds,thecompanywww.hackshp.cn’soverallcostofcapitalisunchangeddespiteincreasinginterestratespaidasthefirmborrowsmore.(However,theincreasinginterestratesmaysignalanincreasingprobabilityoffinancialdistress—andthatcanbeimportant.)9.Examplesofsuchsecuritiesaregiveninthetextandincludeunbundledstockunits,preferredequityredemptioncumulativestockandfloating-ratenotes.Notethat,inordertosucceed,suchsecuritiesmustbothmeetregulatoryrequirementsandappealtoanunsatisfiedclientele.140khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10.a.Asleverageisincreased,thecostofequitycapitalrises.Thisisthesameassayingthat,asleverageisincreased,theratiooftheincomeafterinterest(whichisthecashflowstockholdersareentitledto)tothevalueofequityincreases.Thus,asleverageincreases,theratioofthemarketvalueoftheequitytoincomeafterinterestdecreases.b.(i)AssumeMMarecorrect.Themarketvalueofthefirmisdeterminedbytheincomeofthefirm,nothowitisdividedamongthefirm’ssecurityholders.Also,thefirm’sincomebeforeinterestisindependentofthefirm’sfinancing.Thus,boththevalueofthefirmandthevalueofthefirm’sincomebeforeinterestremainconstantasleverageisincreased.Hence,theratioisaconstant.khdaw.com(ii)Assumethetraditionalistsarecorrect.Thefirm’sincomebeforeinterestisindependentofleverage.Asleverageincreases,thefirm’scostofcapitalfirstdecreasesandthenincreases;asaresult,themarketvalueofthefirmfirstincreasesandthendecreases.Thus,theratioofthemarketvalueofthefirmtofirmincomebeforeinterestfirstincreasesandthendecreases,asleverageincreases.11.WebeginwithrEandthecapitalassetpricingmodel:rE=rf+βE(rm–rf)=0.10+1.5(0.18–0.10)=0.22=22.0%Similarlyfordebt:课后答案网rD=rf+βD(rm–rf)0.12=0.10+βD(0.18–0.10)βD=0.25www.hackshp.cnAlso,weknowthat:⎛D⎞⎛E⎞r=⎜×r⎟+⎜×r⎟=(0.5×0.12)+(0.5×0.22)=0.17=17.0%A⎜⎝D+ED⎟⎠⎜⎝D+EE⎟⎠TosolveforβA,usethefollowing:⎛D⎞⎛E⎞β=⎜×β⎟+⎜×β⎟=(0.5×0.25)+(0.5×1.5)=0.875A⎜D+ED⎟⎜D+EE⎟⎝⎠⎝⎠141khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 12.WeknowfromPropositionIthatthevalueofthefirmwillnotchange.Also,becausetheexpectedoperatingincomeisunaffectedbychangesinleverage,thefirm’soverallcostofcapitalwillnotchange.Inotherwords,rAremainsequalto17%andβAremainsequalto0.875.However,riskand,hence,theexpectedreturnforequityandfordebtwillchange.WeknowthatrDis11%,sothat,fordebt:rD=rf+βD(rm–rf)0.11=0.10+βD(0.18–0.10)βD=0.125Forequity:khdaw.com⎛D⎞⎛E⎞r=⎜×r⎟+⎜×r⎟A⎜⎝D+ED⎟⎠⎜⎝D+EE⎟⎠0.17=(0.3×0.11)+(0.7×rE)rE=0.196=19.6%Also:rE=rf+βE(rm–rf)0.196=0.10+βE(0.18–0.10)βE=1.20课后答案网13.[Note:Inthefollowingsolution,wehaveassumedthat$200millionoflong-termbondshavebeenissued.]www.hackshp.cna.E=$55×10million=$550millionV=D+E=$200million+$550million=$750millionD$200million==0.267V$750millionE$550million==0.733V$750millionDEAfter-taxWACC=r(1−T)+rDCVEV=0.07×(1−0.35)×0.267+(0.12×0.733)=0.1001=10.01%142khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.AsindicatedinTable17.4inthetext,theafter-taxWACCwouldincreasetotheextentofthelossofthetaxdeductibilityoftheinterestondebt.Therefore,theafter-taxWACCwouldequaltheopportunitycostofcapital,computedfromtheWACCformulawithoutthetax-deductibilityofinterest:DEWACC=r+r=(0.07×0.267)+(0.12×0.733)=0.1067=10.67%DVEV14.Wemakeuseofthebasicrelationship:⎛D⎞⎛E⎞r=⎜r(1−T)⎟+⎜r×⎟khdaw.comA⎝DCV⎠⎝EV⎠Sinceoverallbeta(βA)isnotaffectedbycapitalstructureortaxes,then:rA=rf+βA(rm–rf)=0.06+(1.5×0.08)=0.18ThefollowingtableshowsthevalueofrEforvariousvaluesofD/E(andthecorrespondingvaluesofD/V),derivedfromtheaboveformula.Thegraphisbelowthetable.D/ED/VrArDrE0.000.000000.180.06000.18000.050.047620.180.06000.18710.100.09091课后答案网0.180.06000.19410.150.130430.180.06000.20120.200.166670.180.06000.20820.250.200000.180.06000.21530.300.230770.180.06100.22210.350.25926www.hackshp.cn0.180.06200.22890.400.285710.180.06320.23560.450.310340.180.06400.24230.500.333330.180.06500.24890.550.354840.180.06600.25540.600.375000.180.06700.26190.650.393940.180.06800.26830.700.411760.180.06900.27460.750.428570.180.06900.28140.800.444440.180.07000.28760.850.459460.180.07250.29290.900.473680.180.07500.29810.950.487180.180.07750.30311.000.500000.180.08000.3080143khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 0.350000.300000.250000.200000.15000Return0.100000.050000.00000khdaw.com0.000.200.400.600.801.00D/EReturnD/ErArDrErE.4000.180.100.18.3010.180.100.2620.180.100.34.20rA30.180.100.42.10课后答案网rD123D/Ewww.hackshp.cnReturnD/VrArDrE.40rE00.180.100.180.300.250.180.100.207.200.500.180.100.260rA0.750.180.100.420.10rD.25.50.75D/V144khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Assumetheelectionisnearsothatwecansafelyignorethetimevalueofmoney.Becauseone,andonlyone,ofthreeeventswilloccur,theguaranteedpayofffromholdingallthreeticketsis$10.Thus,thethreetickets,takentogether,couldneversellforlessthan$10.Thisistruewhethertheyarebundledintoonecompositesecurityorunbundledintothreeseparatesecurities.However,unbundledtheymaysellformorethan$10.Thiswilloccuriftheseparateticketsfillaneedforsomecurrentlyunsatisfiedclientele.Ifthisisindeedthecase,thenPropositionIfails.Thesumofthepartsisworthmorethanthewhole.khdaw.com2.Someshoppersmaywantonlythechickendrumstick.Theycouldbuyawholechicken,cutitup,andsellofftheotherpartsinthesupermarketparkinglot.Thisiscostly.Itisfarmoreefficientforthestoretocutupthechickenandsellthepiecesseparately.Butthisalsohassomecost,hencetheobservationthatsupermarketschargemoreforchickensaftertheyhavebeencut.Thesameconsiderationsaffectfinancialproducts,but:a.Theproportionatecoststocompaniesofrepackagingthecashflowstreamaregenerallysmall.b.Investorscanalsorepackagecashflowscheaplyforthemselves.Infact,specialistfinancialinstitutionscanoftendosomorecheaplythanthe课后答案网companiescandoitthemselves.3.Firmsthatareabletoidentifyan‘unswww.hackshp.cnatisfied’clienteleandthendesignafinancialserviceorinstrumentthatsatisfiesthedemandsofthisclientelecan,inviolationofMM’scapital-structureirrelevancetheory,enhancefirmvalue.However,ifthisisdonesuccessfullybyonefinancialinnovator,otherswillfollow,eventuallyrestoringthevalidityoftheMMirrelevancetheory.However,ifthefinancialinnovationcanbepatented,thecreatoroftheinnovationcanrestricttheuseoftheinnovationbyotherfinancialmanagersandtherebycontinuetousetheinnovationtocreatevalue.Consequently,MM’scapital-structureirrelevancetheorywouldpotentiallybeviolatedduringthelifeofthepatent.145khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER18HowMuchShouldaFirmBorrow?AnswerstoPracticeQuestions1.For$1ofdebtincome:Corporatetax=$0Personaltax=0.35×$1=$0.350Total=$0.350khdaw.comFor$1ofequityincome,withallcapitalgainsrealizedimmediately:Corporatetax=0.35×$1=$0.350Personaltax=0.35×0.5×[$1–(0.35×$1)]+0.15×0.5×[$1–(0.35×$1)]=$0.163Total=$0.513For$1ofequityincome,withallcapitalgainsdeferredforever:Corporatetax=0.35×$1=$0.350Personaltax=0.35×0.5×[$1–(0.35×$1)]=$0.114Total=$0.4642.Considerafirmthatislevered,hasperpetualexpectedcashflowX,andhasan课后答案网interestratefordebtofrD.ThepersonalandcorporatetaxratesareTpandTc,respectively.Thecashflowtostockholderseachyearis:(X-rDD)(1-Tc)(1-Tp)www.hackshp.cnTherefore,thevalueofthestockholders’positionis:(X)(1−Tc)(1−Tp)(rD()D)(1−Tc)(1−Tp)V=−L(r)(1−T)(r)(1−T)pDp(X)(1−T)(1−T)cpV=−[(D)(1−T)]Lc(r)(1−Tp)whereristheopportunitycostofcapitalforanall-equity-financedfirm.IfthestockholdersborrowDatthesameraterD,andinvestintheunleveredfirm,theircashfloweachyearis:[(X)(1−T)(1−T)]−[r(()D)(1−T)]cpDp146khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Thevalueofthestockholders’positionisthen:(X)(1−T)(1−T)(r()D)(1−T)V=cp−DpU(r)(1−Tp)(rD)(1−Tp)(X)(1−T)(1−T)cpV=−DU(r)(1−T)pThedifferenceinstockholderwealth,forinvestmentinthesameassets,is:VL–VU=DTcThisisthechangeinstockholderwealthpredictedbyMM.khdaw.comIfindividualscouldnotdeductinterestforpersonaltaxpurposes,then:(X)(1−Tc)(1−Tp)(rD)(D)V=−U(r)(1−Tp)(rD)(1−Tp)Then:(r()D)−r([)(D)(1−T)(1−T)]DDcpVL−VU=(r)(1−T)Dp⎛T⎞V−V=(DT)+⎜Dp⎟LUc⎜(1−T)⎟⎝p⎠Sothevalueoftheshareholders’positionintheleveredfirmisrelativelygreater课后答案网whennopersonalinterestdeductionisallowed.3.ThebookvalueofPfizer’sassetsis$97,652million.Witha40percentbookdebtratio:www.hackshp.cnLong-termdebt+Otherlong-termliabilities=0.40×$97,652=$39,061millionThisis[$39,061–($8,144+$21,460)]=$9,457millionmorethanshowninTable18.3(a).Thecorporatetaxrateis35percent,sofirmvalueincreasesby:0.35×$9,457=$3,310millionThemarketvalueofthefirmisnow:($296,975+$3,310)=$300,285millionThemarketvaluebalancesheetis:Networkingcapital$10,752$17,601Long-termdebtPVinteresttaxshield6,16021,460Otherlong-termliabilitiesLong-termassets283,373261,224EquityTotalAssets$300,285$300,285Totalvalue4.Internetexercise;answerswillvarydependingonthetimeperiod.147khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.AssumethefollowingfactsforCircularFile:BookValuesNetworkingcapital$20$50BondsoutstandingFixedassets8050CommonstockTotalassets$100$100TotalvalueMarketValuesNetworkingcapital$20$25BondsoutstandingFixedassets105CommonstockTotalassets$30$30Totalvaluea.PlayingforTimeSupposeCircularFileforegoesreplacementof$10ofcapitalequipment,khdaw.comsothatthenewbalancesheetmayappearasfollows:MarketValuesNetworkingcapital$30$29BondsoutstandingFixedassets89CommonstockTotalassets$38$38TotalvalueHeretheshareholderisbetteroffbuthasobviouslydiminishedthefirm’scompetitiveability.b.CashInandRunSupposethefirmpaysa$5dividend:课后答案网MarketValuesNetworkingcapital$15$23BondsoutstandingFixedassets102CommonstockTotalassets$25$25TotalvalueHerethevalueofcommonstockshouldhavefallentozero,butthewww.hackshp.cnbondholdersbearpartoftheburden.c.BaitandSwitchMarketValuesNetworkingcapital$30$20NewBondsoutstanding20OldBondsoutstandingFixedassets2010CommonstockTotalassets$50$50Totalvalue6.Answersherewillvaryaccordingtothecompanieschosen;however,theimportantconsiderationsaregiveninthetext,Section18.3.148khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 7.a.SOSstockholderscouldloseiftheyinvestinthepositiveNPVprojectandthenSOSbecomesbankrupt.Undertheseconditions,thebenefitsoftheprojectaccruetothebondholders.b.Ifthenewprojectissufficientlyrisky,then,eventhoughithasanegativeNPV,itmightincreasestockholderwealthbymorethanthemoneyinvested.Thisisaresultofthefactthat,foraveryriskyinvestment,undertakenbyafirmwithasignificantriskofdefault,stockholdersbenefitifamorefavorableoutcomeisactuallyrealized,whilethecostofunfavorableoutcomesisbornebybondholders.c.Again,thinkoftheextremecase:SupposeSOSpaysoutallofitsassetsasonelump-sumdividend.Stockholdersgetalloftheassets,andthekhdaw.combondholdersareleftwithnothing.Theseconflictsofinterestaresevereonlywhenthecompanyisinfinancialdistress.Adherencetoamoderatetargetdebtratiolimitstheconflicts.8.a.Thebondholdersbenefit.Thefineprintlimitsactionsthattransferwealthfromthebondholderstothestockholders.b.Thestockholdersbenefit.Intheabsenceoffineprint,bondholderschargeahigherrateofinteresttoensurethattheyreceiveafairdeal.Thefirmwouldprobablyissuethebondwithstandardrestrictions.Itislikelythat课后答案网therestrictionswouldbelesscostlythanthehigherinterestrate.9.Otherthingsequal,theannouncementofanewstockissuetofundanwww.hackshp.cninvestmentprojectwithanNPVof$40millionshouldincreaseequityvalueby$40million(lessissuecosts).But,basedonpastevidence,managementexpectsequityvaluetofallby$30million.Theremaybeseveralreasonsforthediscrepancy:(i)Investorsmayhavealreadydiscountedtheproposedinvestment.(However,thisalonewouldnotexplainafallinequityvalue.)(ii)Investorsmaynotbeawareoftheprojectatall,buttheymaybelieveinsteadthatcashisrequiredbecauseof,say,lowlevelsofoperatingcashflow.(iii)Investorsmaybelievethatthefirm’sdecisiontoissueequityratherthandebtsignalsmanagement’sbeliefthatthestockisovervalued.Ifthestockisindeedovervalued,thestockissuemerelybringsforwardastockpricedeclinethatwilloccureventuallyanyway.Therefore,thefallinvalueisnotanissuecostinthesamesenseastheunderwriter’sspread.Ifthestockisnotovervalued,managementneedstoconsiderwhetheritcouldreleasesomeinformationtoconvinceinvestorsthatitsstockiscorrectlyvalued,orwhetheritcouldfinancetheprojectbyanissueofdebt.149khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10.a.Masulis’resultsareconsistentwiththeviewthatdebtisalwayspreferablebecauseofitstaxadvantage,butarenotconsistentwiththe‘tradeoff’theory,whichholdsthatmanagementstrikesabalancebetweenthetaxadvantageofdebtandthecostsofpossiblefinancialdistress.Inthetradeofftheory,exchangeofferswouldbeundertakentomovethefirm’sdebtleveltowardtheoptimum.Thatoughttobegoodnews,ifanything,regardlessofwhetherleverageisincreasedordecreased.b.Theresultsareconsistentwiththeevidenceregardingtheannouncementeffectsonsecurityissuesandrepurchases.c.Oneexplanationisthattheexchangeofferssignalmanagement’sassessmentofthefirm’sprospects.Managementwouldonlybewillingtokhdaw.comtakeonmoredebtiftheywerequiteconfidentaboutfuturecashflow,forexample,andwouldwanttodecreasedebtiftheywereconcernedaboutthefirm’sabilitytomeetdebtpaymentsinthefuture.11.a.ExpectedPayofftoBankExpectedPayofftoMs.KetchupProject1+10.0+5Project2(0.4×10)+(0.6×0)=+4.0(0.4×14)+(0.6×0)=+5.6Ms.KetchupwouldundertakeProject2.b.BreakevenwilloccurwhenMs.Ketchup’sexpectedpayofffromProject2课后答案网isequaltoherexpectedpayofffromProject1.IfXisMs.Ketchup’spaymentontheloan,thenherpayofffromProject2is:0.4(24–X)www.hackshp.cnSettingthisexpressionequalto5(Ms.Ketchup’spayofffromProject1),andsolving,wefindthat:X=11.5Therefore,Ms.Ketchupwillborrowlessthanthepresentvalueofthispayment.12.Internetexercise;answerswillvary.13.Internetexercise;answerswillvary.150khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Therightmeasureinprincipleistheratioderivedfrommarket-valuebalancesheets.Bookbalancesheetsrepresenthistoricalvaluesfordebtandequitywhichcanbesignificantlydifferentfrommarketvalues.Anychangesincapitalstructurearemadeatcurrentmarketvalues.Thetrade-offtheoryproposestoexplainmarketleverage.Increasesordecreasesindebtlevelstakeplaceatmarketvalues.Forexample,adecisiontoreducethelikelihoodoffinancialdistressbyretirementofdebtmeansthatexistingdebtisacquiredatmarketvalue,andthattheresultingdecreaseininteresttaxshieldsisbasedonthemarketvalueoftheretireddebt.Similarly,akhdaw.comdecisiontoincreaseinteresttaxshieldsbyincreasingdebtrequiresthatnewdebtbeissuedatcurrentmarketprices.Similarly,thepecking-ordertheoryisbasedonmarketvaluesofdebtandequity.Internalfinancingfromreinvestedearningsisequityfinancingbasedoncurrentmarketvalues;thealternativetoincreasedinternalfinancingisadistributionofearningstoshareholders.Debtcapacityismeasuredbythecurrentmarketvalueofdebtbecausethefinancialmarketsviewtheamountofexistingdebtasthepaymentrequiredtopayoffthatdebt.2.Internetexercise;answerswillvary.课后答案网www.hackshp.cn151khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER19FinancingandValuationAnswerstoPracticeQuestions1.Ifthebankdebtistreatedaspermanentfinancing,thecapitalstructureproportionsare:Bankdebt(rD=10percent)$2809.4%Long-termdebt(rD=9percent)180060.4Equity(rE=18percent,90x10millionshares)90030.2khdaw.com$2980100.0%WACC*=[0.10×(1-0.35)×0.094]+[0.09×(1-0.35)×0.604]+[0.18×0.302]=0.096=9.6%2.Forecastafter-taxincrementalcashflowsasexplainedinSection6.1.Interestisnotincluded;theforecastsassumeanall-equityfinancedfirm.3.CalculateAPVbysubtracting$4millionfrombase-caseNPV.4.Wemakethreeadjustmentstothebalancesheet:课后答案网•Ignoredeferredtaxes;thisisanaccountingentryandrepresentsneitheraliabilitynorasourceoffunds•‘Netout’accountspayableagainstcurrentassets•Usethemarketvalueofequity(7.46millionx$46)www.hackshp.cnNowtheright-handsideofthebalancesheet(inthousands)is:Short-termdebt$75,600Long-termdebt208,600Shareholders’equity343,160Total$627,360Theafter-taxweighted-averagecostofcapitalformula,withoneelementforeachsourceoffunding,is:WACC=[rD-ST×(1–Tc)×(D-ST/V)]+[rD-LT×(1–Tc)×(D-LT/V)]+[rE×(E/V)]WACC=[0.06×(1–0.35)×(75,600/627,360)]+[0.08×(1–0.35)×(208,600/627,360)]+[0.15×(343,160/627,360)]=0.004700+0.017290+0.082049=0.1040=10.40%152khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.Assumethatshort-termdebtistemporary.FromPracticeQuestion4:Long-termdebt$208,600Shareholderequity343,160Total$551,760Therefore:D/V=$208,600/$551,760=0.378E/V=$343,160/$551,760=0.622Step1:r=rD(D/V)+rE(E/V)=(0.08×0.378)+(0.15×0.622)=0.1235Stepkhdaw.com2:rE=r+(r–rD)(D/E)=0.1235+(0.1235–0.08)×(0.403)=0.1410Step3:WACC=[rD×(1–TC)×(D/V)]+[rE×(E/V)]=(0.08×0.65×0.287)+(0.1410×0.713)=0.1155=11.55%26.BasecaseNPV=–$1,000+($600/1.12)+($700/1.12)=$93.75or$93,750DebtOutstandingat课后答案网InterestPVYearStartOfYearInterestTaxShield(TaxShield)1300247.206.672150123.603.09APV=$93.75+$6.67+$3.09=103.5or$103,500www.hackshp.cn7.a.Base-caseNPV=–$1,000,000+($85,000/0.10)=–$150,000PV(taxshields)=0.35×$400,000=$140,000APV=–$150,000+$140,000=–$10,000b.PV(taxshields,approximate)=(0.35×0.07×$400,000)/0.10=$98,000APV=-$150,000+$98,000=–$52,000Thepresentvalueofthetaxshieldishigherwhenthedebtisfixedandthereforethetaxshieldiscertain.Whenborrowingaconstantproportionofthemarketvalueoftheproject,theinteresttaxshieldsareasuncertainasthevalueoftheproject,andthereforemustbediscountedattheproject’sopportunitycostofcapital.153khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.Theimmediatesourceoffunds(i.e.,boththeproportionborrowedandtheexpectedreturnonthestockssold)isirrelevant.Theprojectwouldnotbeanymorevaluableiftheuniversitysoldstocksofferingalowerreturn.Ifborrowingisazero-NPVactivityforatax-exemptuniversity,thenbase-caseNPVequalsAPV,andtheadjustedcostofcapitalr*equalstheopportunitycostofcapitalwithall-equityfinancing.Here,base-caseNPVisnegative;theuniversityshouldnotinvest.10$1.759.a.Base-caseNPV=−$10+∑=−$0.11or–$110,000tt=11.12khdaw.comAPV=Base-caseNPV+PV(taxshield)PV(taxshield)iscomputedfromthefollowingtable:DebtOutstandingInterestPresentValueYearInterestatStartofYearTaxShieldofTaxShield1$5,000$400$140$129.6324,500360126108.0234,00032011288.9143,5002809872.0353,0002408457.1762,500课后答案网2007044.1172,0001605632.6881,5001204222.6991,000www.hackshp.cn802814.011050040146.48Total575.74APV=–$110,000+$575,740=$465,740b.APV=Base-caseNPV+PV(taxshield)–equityissuecosts=–$110,000+$575,740–$400,000=$65,74010.Answerswillvary.154khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 11.Notethefollowing:•Thecostsofdebtandequityarenot8.5%and19%,respectively.Thesefiguresassumetheissuecostsarepaideveryyear,notjustatissue.•ThefactthatBunsencanfinancetheentirecostoftheprojectwithdebtisirrelevant.Thecostofcapitaldoesnotdependontheimmediatesourceoffunds;whatmattersistheproject’scontributiontothefirm’soverallborrowingpower.•Theprojectisexpectedtosupportdebtinperpetuity.Thefactthatthefirstdebtissueisforonly20yearsisirrelevant.Assumetheprojecthasthesamebusinessriskasthefirm’sotherassets.Becauseitisaperpetuity,wecanusethefirm’sweighted-averagecostofcapital.khdaw.comIfweignoreissuecosts:WACC=[rD×(1–TC)×(D/V)]+[rE×(E/V)]WACC=[0.07×(1–0.35)×0.4]+[0.14×0.6]=0.1022=10.22%Usingthisdiscountrate:$130,000NPV=−$1,000,000+=$272,0160.1022Theissuecostsare:Stockissue:(0.050×$1,000,000)=$50,000Bondissue:(0.015×$1,000,000)=$15,000Debtisclearlylessexpensive.Proj课后答案网ectNPVnetofissuecostsisreducedto:($272,016-$15,000)=$257,016.However,ifdebtisused,thefirm’sdebtratiowillbeabovethetargetratio,andmoreequitywillhavetoberaisedlater.Ifdebtfinancingcanbeobtainedusingretainingearnings,thentherearenootherissuecoststoconsider.Ifstockwillbeissuedtoregainthetargetdebtratio,anwww.hackshp.cnadditionalissuecostisincurred.AcarefulestimateoftheissuecostsattributabletothisprojectwouldrequireacomparisonofBunsen’sfinancialplan‘with’ascomparedto‘without’thisproject.12.Disagree.TheBanker’sTrystcalculationsarebasedontheassumptionthatthecostofdebtwillremainconstant,andthatthecostofequitycapitalwillnotchangeeventhoughthefirm’sfinancialstructurehaschanged.Theformerassumptionisappropriatewhilethelatterisnot.155khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 13.a.AssumethattheexpectedfutureTreasury-billrateisequaltothe20-yearTreasurybondrate(5.2%)lesstheaveragehistoricalpremiumofTreasurybondsoverTreasurybills(1.8%),sothattherisk-freerate(rf)is3.4%.Alsoassumethatthemarketriskpremium(rm–rf)is8%.Then,usingtheCAPM,wefindrEasfollows:rE=rf+βA×[rm–rf]=3.4%+(0.46×8%)=7.08%Marketvalueofequity(E)isequalto:324.5×$40.59=$13,171.5sothat:V=$2,327+$13,171.5=$15,498.5D/V=$2,327/$15,498.5=0.150khdaw.comE/V=$13,171.5/$15,498.5=0.850WACC=(0.850×7.08%)+(0.150×0.65×7.0%)=6.70%b.Opportunitycostofcapital=r=rD×(D/V)+rE×(E/V)=7.0%×0.150+7.08%×0.850=7.07%c.Internetexercise;answerswillvary.14.Latest课后答案网yearForecast0123451.Sales40,123.036,351.030,155.028,345.029,982.030,450.02.CostofGoodsSold22,879.021,678.017,560.016,459.015,631.014,987.03.OtherCosts8,025.06,797.05,078.04,678.04,987.05,134.04.EBITDA(1–2–3)www.hackshp.cn9,219.07,876.07,517.07,208.09,364.010,329.05.DepreciationandAmortization5,678.05,890.05,670.05,908.06,107.05,908.06.EBIT(Pretaxprofit)(4–5)3,541.01,986.01,847.01,300.03,257.04,421.07.Taxat35%1,239.4695.1646.5455.01,140.01,547.48.Profitaftertax(6–7)2,301.71,290.91,200.6845.02,117.12,873.79.Changeinworkingcapital6,547.07,345.05,398.05,470.06,420.06,598.010.Investment(changeinGrossPP&E)784.0-54.0-342.0-245.0127.0235.011.FreeCashFlow(8+5–9–10)648.7-110.11,814.61,528.01,677.11,948.7PVFreecashflow,years1-43,501.6Horizonvalueinyear4PVHorizonvalue15,480.024,358.1PVofcompany18,981.7Thetotalvalueoftheequityis:$18,981.7–$5,000=$13,981.7Valuepershare=$13,981.7/865=$16.16156khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 15.Theawardisrisk-freebecauseitisowedbytheU.S.government.Theafter-taxamountoftheawardis:0.65×$16million=$10.40millionTheafter-taxdiscountrateis:0.65×0.055=0.03575=3.575%Thepresentvalueoftheawardis:$10.4million/1.03575=$10.04million16.Theafter-taxcashflowsare:0.65×$100,000=$65,000peryear.Theafter-taxdiscountrateis:0.65×0.09=0.0585=5.85%Thepresentvalueoftheleaseisequaltothepresentvalueofafive-yearannuityof$65,000peryearplustheimmediate$65,000payment:khdaw.com$65,000×[annuityfactor,5.85%,5years]+$65,000=($65,000×4.2296)+$65,000=$339,924课后答案网www.hackshp.cn157khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Foraone-periodprojecttohavezeroAPV:C(T×r×D)APV=C+1+CD=001+rA1+rDRearranginggives:C⎛D⎞⎛1+r⎞1−1=r−(T×r)⎜⎟⎜A⎟−CCD⎜−C⎟⎜1+r⎟0⎝0⎠⎝D⎠Foraone-periodproject,theleft-handsideofthisequationistheprojectkhdaw.comIRR.Also,(D/-C0)istheproject’sdebtcapacity.Therefore,theminimumacceptablereturnis:⎛1+r⎞A*r=rA−(TC×rD×L)⎜⎜⎟⎟1+r⎝D⎠*⎛1.0984⎞b.r=0.0984−(0.35×0.06×0.20)⎜⎟=.09405⎝1.06⎠2.Fixeddebtlevels,withoutrebalancing,arenotnecessarilybetterforstockholders.课后答案网Notethat,whenthedebtisrebalanced,nextyear’sinteresttaxshieldsarefixedand,thus,discountedatalowerrate.Thefollowingyear’sinterestisnotknownwithcertaintyforoneyearand,hence,isdiscountedforoneyearatthehigherriskyrateandforoneyearatthelowerrate.Thisismuchmorerealisticsinceitrecognizestheuncertaintyoffutureevents.www.hackshp.cn3.ThetablebelowisamodificationofTable19.1basedontheassumptionthat,afteryear7:•Salesremainconstant(thatis,growth=0%);•Costsremainat76.0%ofsales;•Depreciationremainsat14.0%ofnetfixedassets;•Netfixedassetsremainconstantat93.8;•Workingcapitalremainsat13.0%ofsales.158khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com TABLE19.1FreecashflowprojectionsandcompanyvalueforRioCorporation($millions)LatestyearForecast0123456781.Sales83.689.595.8102.5106.6110.8115.2118.7118.72.Costofgoodssold63.166.271.376.379.983.187.090.290.23.EBITDA(1-2)20.523.324.426.126.627.728.228.528.54.Depreciation3.39.910.611.311.812.312.713.113.15.Profitbeforetax(EBIT)(3-4)17.213.413.814.814.915.415.515.415.46.Tax6.04.74.85.25.25.45.45.45.47.Profitaftertax(5-6)11.28.79.09.69.710.010.110.010.08.Investmentinfixedassetskhdaw.com11.014.615.516.615.015.616.215.913.19.Investmentinworkingcapital1.00.50.80.90.50.60.60.40.010.Freecashflow(7+4-8-9)2.53.53.23.45.96.16.06.810.0PVFreecashflow,years1-620.3(Horizonvalueinyear7)PVHorizonvalue60.7110.9PVofcompany81.0Assumptions:Salesgrowth(percent)6.77.07.07.04.04.04.03.00.0Costs(percentofsales)75.574.074.574.575.075.075.576.076.0Workingcapital(%ofsales)13.313.013.013.013.013.013.013.013.0Netfixedassets(%ofsales)课后答案网79.279.079.079.079.079.079.079.079.0Depreciation(%netfixedassets)5.014.014.014.014.014.014.014.014.0Taxrate,%35.0Costofdebt,%(rD)6.0Costofequity,%(rE)www.hackshp.cn12.4Debtratio(D/V)0.4WACC,%9.0Long-termgrowthforecast,%0.0FixedassetsandworkingcapitalGrossfixedassets95.0109.6125.1141.8156.8172.4188.6204.5217.6Lessaccumulateddepreciation29.038.949.560.872.684.997.6110.7123.9Netfixedassets66.070.775.680.984.287.591.093.893.8Networkingcapital11.111.612.413.313.914.415.015.415.4159khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER20UnderstandingOptionsAnswerstoPracticeQuestions1.a.Theputplacesaflooronvalueofinvestment,i.e.,lessriskythanbuyingstock.Theriskreductioncomesatthecostoftheoptionpremium.b.Benefitfromupside,butalsoloseonthedownside.c.Anakedoptionpositionisriskierthantheunderlyingasset.Investorgainsfromincreaseinstockprice,butlosesentireinvestmentifstockpriceiskhdaw.comlessthanexercisepriceatexpiration.d.Investorexchangesuncertainupsidechangesinstockpricefortheknownup-frontincomefromtheoptionpremium.e.Safeinvestmentifthedebtisriskfree.f.Fromput-callparity,thisisequivalent(forEuropeanoptions)to‘buybond.’Therefore,thisisasafeinvestment.g.Anothernaked,high-riskpositionwithknownup-frontincomebutexposuretodownmovementsinstockprice.课后答案网2.Whileitistruethatboththebuyerofacallandthesellerofaputhopethepricewillrise,thetwopositionsarenotidentical.Thebuyerofacallwillfindherprofitchangingfromzeroandincreasingasthestockpricerises[seetextFigure20.1(a)],whilethesellerofaputwillfindhislossdecreasingandthenwww.hackshp.cnremainingatzeroasthestockpricerises[seetextFigure20.2(b)].3.YouwouldbuytheAmericancallfor$75,exercisethecallimmediatelyinordertopurchaseashareofPintailstockfor$50,andthenselltheshareofPintailstockfor$200.Thenetgainis:$200–($75+$50)=$75.IfthecallisaEuropeancall,youshouldbuythecall,depositinthebankanamountequaltothepresentvalueoftheexerciseprice,andsellthestockshort.Thisproducesacurrentcashflowequalto:$200–$75–($50/1+r)Atthematurityofthecall,theactiondependsonwhetherthestockpriceisgreaterthanorlessthantheexerciseprice.Ifthestockpriceisgreaterthan$50,thenyouwouldexercisethecall(usingthecashfromthebankdeposit)andbuybackthestock.Ifthestockpriceislessthan$50,thenyouwouldletthecallexpireandbuybackthestock.Thecashflowatmaturityisthegreaterofzero(ifthestockpriceisgreaterthan$50)or[$50–stockprice](ifthestockpriceislessthan$50).Therefore,thecashflowsarepositivenowandzeroorpositiveoneyearfromnow.160khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.LetP3=thevalueofthethreemonthput,C3=thevalueofthethreemonthcall,S=themarketvalueofashareofstock,andEX=theexercisepriceoftheoptions.Then,fromput-callparity:0.25C3+[EX/(1+r)]=P3+SSincebothoptionshaveanexercisepriceof$60andbothareworth$10,then:0.25EX/(1+r)=SFromput-callparityforthesix-monthoptions,wehave:0.50C6+[EX/(1+r)]=P6+S0.250.500.25SinceS=EX/(1+r)andEX/(1+r)islessthanEX/(1+r),thenthevalueofthesix-monthcallisgreaterthanthevalueofthesix-monthput.khdaw.com5.Fromput-callparity:(2/3)C+[EX/(1+r)]=P+S(2/3)(2/3)P=–S+C+[EX/(1+r)]=–54+9.05+[50/(1.015)]=$4.566.Internetexercise;answerswillvary.7.The$100millionthresholdcanbeviewed课后答案网asanexerciseprice.Sinceshegains20%ofallprofitsinexcessofthislevel,itiscomparabletoacalloption.Whetherthisprovidesanadequateincentivedependsonhowachievablethe$100millionthresholdisandhowMs.Cableevaluatesherprospectsofgeneratingincomegreaterthanthisamount.www.hackshp.cn161khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.a.Thepayoffsatexpirationforthetwooptionsareshowninthefollowingpositiondiagram:Optionvalue15010050khdaw.com50100150Shareprice-50-100Takingintoaccountthe$100thatmustberepaidatexpiration,thenetpayoffsare:Netpayoff课后答案网150100www.hackshp.cn5050100150Shareprice-50-100162khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Herewecanusetheput-callparityrelationship:Valueofcall+Presentvalueofexerciseprice=Valueofput+SharepriceThevalueofMr.Colleoni’spositionis:Valueofput(EX=150)–Valueofput(EX=50)–PV(150–50)Usingtheput-callparityrelationship,wefindthatthisisequalto:Valueofcall(EX=150)–Valueofcall(EX=50)Thus,onecombinationthatgivesMr.Colleonithesamepayoffsis:°Buyacallwithanexercisepriceof$150khdaw.com°Sellacallwithanexercisepriceof$50Similarly,anothercombinationwiththesamesetofpayoffsis:°Buyaputwithanexercisepriceof$150°Buyashareofstock°Borrowthepresentvalueof$150°Sellacallwithanexercisepriceof$509.Statement(b)iscorrect.TheappropriatediagramsareinFigure20.6inthetext.ThefirstrowofdiagramsinFigure20.6showsthepayoffsforthestrategy:Buyashareofstockandbuyaput.ThesecondrowofFigure20.6showsthepayoffsforthestrategy:课后答案网Buyacallandlendanamountequaltotheexerciseprice.www.hackshp.cn10.Answersherewillvarydependingontheoptionschosen,buttheformulaswillworkverywell;discrepanciesshouldbeontheorderof5percentorso,atmost.11.Wemakeuseoftheput-callparityrelationship:Valueofcall+Presentvalueofexerciseprice=Valueofput+Sharepricea.Rearrangingtheput-callparityrelationshiptoshowashortsaleofashareofstock,wehave:(–Shareprice)=Valueofput–Valueofcall–PV(EX)Thisimpliesthat,inordertoreplicateashortsaleofashareofstock,youwouldpurchaseaput,sellacall,andborrowthepresentvalueoftheexerciseprice.163khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Againwerearrangetheput-callparityrelationship:PV(EX)=Valueofput-Valueofcall+SharepriceThisimpliesthat,inordertoreplicatethepayoffsofabond,youbuyaput,sellacall,andbuythestock.12.a.Usetheput-callparityrelationshipforEuropeanoptions:Valueofcall+Presentvalueofexerciseprice=Valueofput+SharepriceSolveforthevalueoftheput:khdaw.comValueofput=Valueofcall+PV(EX)–SharepriceThus,toreplicatethepayoffsfortheput,youwouldbuya26-weekcallwithanexercisepriceof$100,investthepresentvalueoftheexercisepriceina26-weekrisk-freesecurity,andsellthestockshort.b.Usingtheput-callparityrelationship,theEuropeanputwillsellfor:$8+($100/1.05)–$90=$13.2413.a.Fromtheput-callparityrelationship:Valueofcall+Presentvalueofexerciseprice=Valueofput+SharepriceEquity+PV(Debt,atrisk-freerate)=Defaultoption+Assets课后答案网$250+$350=$70+$530b.Valueofdefaultput=$350-$280=$70www.hackshp.cn14.StraddlePayoffPayofftoput100PayofftocallShareprice100164khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ButterflyPayoffPayofftobuycall,Payofftobuycall,EX=100EX=120Shareprice100120Payofftosellcall,EX=110,selltwokhdaw.comThebuyerofthestraddleprofitsifthestockpricemovessubstantiallyineitherdirection;hence,thestraddleisabetonhighvariability.Thebuyerofthebutterflyprofitsifthestockpricedoesn’tmoveverymuch,andhence,thisisabetonlowvariability.15.Answersherewillvaryaccordingtothestockandthespecificoptionsselected,butallshouldexhibitpropertiesveryclosetothosepredictedbythetheorydescribedinthechapter.课后答案网16.Imaginetwostocks,eachwithamarketpriceof$100.Foreachstock,youhaveanat-the-moneycalloptionwithanexercisepriceof$100.StockA’spricenowfallsto$50andStockB’srisesto$150.Thevalueofyourportfolioofcalloptionsisnow:www.hackshp.cnValueCallonA0CallonB50Total$50Nowcomparethiswiththevalueofanat-the-moneycalltobuyaportfoliowithequalholdingsofAandB.Sincetheaveragechangeinthepricesofthetwostocksiszero,thecallexpiresworthless.Thisisanexampleofageneralrule:Anoptiononaportfolioislessvaluablethanaportfolioofoptionsontheindividualstocksbecause,inthelattercase,youcanchoosewhichoptionstoexercise.165khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 17.Considereachcompanyinturn,makinguseoftheput-callparityrelationship:Valueofcall+Presentvalueofexerciseprice=Valueofput+SharepriceDrongoCorp.Here,theleft-handside[$52+($50/1.05)=$99.62]islessthantheright-handside[$20+$80=$100].Therefore,thereisaslightmispricing.Totakeadvantageofthissituation,oneshouldbuythecall,invest$47.62attherisk-freerate,selltheput,andsellthestockshort.Ragwort,Inc.Here,theleft-handside[$15+($100/1.05)=$110.24)isgreaterthantheright-handside[$10+$80=$90].Therefore,thereisasignificantmispricing.Totakeadvantageofthissituation,oneshouldsellthecall,borrow$95.24attherisk-freerate,buytheput,andbuythestock.khdaw.comWombatCorp.Forthethree-monthoption,theleft-handside[$18+($40/1.025)=$57.02]andtheright-handside[$7+$50=$57]areessentiallyequal,sothereisnomispricing.Forthefirstsix-monthoption,theleft-handside[$17+($40/1.05)=$55.10]isslightlygreaterthantheright-handside[$5+$50=$55],sothereisaslightmispricing.Forthesecondsix-monthoption,theleft-handside[$10+($50/1.05)=$57.62]isslightlylessthantheright-handside[$8+$50=$58],andsothereisaslightmispricing.18.Onestrategymightbetobuyastraddle,thatis,buyacallandaputwith课后答案网exercisepriceequaltotheasset’scurrentprice.Iftheassetpricedoesnotchange,bothoptionsbecomeworthless.However,ifthepricefalls,theputwillbevaluableand,ifpricerises,thecallwillbevaluable.Thelargerthepricemovementineitherdirection,thegreatertheprofit.www.hackshp.cnIfinvestorshaveunderestimatedvolatility,theoptionpriceswillbetoolow.Thus,analternativestrategyistobuyacall(oraput)andhedgeagainstchangesintheassetpricebysimultaneouslyselling(or,inthecaseoftheput,buying)deltasharesofstock.166khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Purchaseacallwithagivenexercisepriceandsellacallwithahigherexerciseprice;borrowthedifferencenecessary.(Thisisknownasa‘BullSpread.’)b.Sellaputandsellacallwiththesameexerciseprice.(Thisisknownasa‘ShortStraddle.’)c.Borrowmoneyandusethismoneytobuyaputandbuythestock.d.Buyonecallwithagivenexerciseprice,selltwocallswithahigherkhdaw.comexerciseprice,andbuyonecallwithastillhigherexerciseprice.(Thisisknownasa‘ButterflySpread.’)2.a.Ifthelandisworthmorethan$110million,Bondwillexerciseitscalloption.Ifthelandisworthlessthan$110million,thebuyerwillexerciseitsputoption.b.Bondhas:(1)soldashare;(2)soldaput;and(3)purchasedacall.Therefore:Payoff课后答案网(3)www.hackshp.cnPriceofland(2)(1)Thisisequivalentto:PayoffPriceofland167khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Theinterestratecanbededucedusingtheput-callparityrelationship.Weknowthatthecallisworth$20,theexercisepriceis$110,andthecombination[sellshareandsellputoption]isworth$110.Therefore:Valueofcall+Presentvalueofexerciseprice=Valueofput+SharepriceValueofcall+PV(EX)=Valueofput+Shareprice20+[110/(1+r)]=110r=0.222=22.2%d.FromtheanswertoPart(a),weknowthatBondwillendupowningthelandaftertheexpirationoftheoptions.Thus,inaneconomicsense,thelandhasnotreallybeensold,anditseemsmisleadingtodeclareaprofitkhdaw.comonasalethatdidnotreallytakeplace.Ineffect,Bondhasborrowedmoney,notsoldanasset.3.OnewaytoprofitfromHogswilloptionsistopurchasethecalloptionswithexercisepricesof$90and$110,respectively,andselltwocalloptionswithanexercisepriceof$100.Theimmediatebenefitisacashinflowof:(2×$11)–($5+$15)=$2Immediatelypriortomaturity,thevalueofthispositionandthenetprofit(atvariouspossiblestockprices)is:StockPrice课后答案网PositionValueNetProfit8500+2=29000+2=29555+2=7100www.hackshp.cn1010+2=1210555+2=711000+2=211500+2=2Thus,nomatterwhatthefinalstockprice,wecanmakeaprofittradingintheseHogswilloptions.Itispossible,butveryunlikely,thatyoucanidentifysuchopportunitiesfromdatapublishedinthenewspaper.Someoneelsehasmostlikelyalreadynoticed(evenbeforethepaperwasprinted,muchlessdistributedtoyou)andtradedontheinformation;suchtradingtendstoeliminatetheseprofitopportunities.168khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.a.OptionValue500,000120StockPriceb.Thisincentiveschemeisacombinationofthefollowingoptions:°Buy4,000,000calloptionswithanexercisepriceof$119.875.khdaw.com°Sell4,000,000calloptionswithanexercisepriceof$120.课后答案网www.hackshp.cn169khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER21ValuingOptionsAnswerstoPracticeQuestions.0245.01.a.u=e=.1185;d=/1u=.0844$63.19$53.33$45.01khdaw.com$45$45.01$37.98$32.06.024.025u=e=.1127;d=/1u=.0887$72.60$64.41$57.14课后答案网$57.16$57.14$50.70$50.72$44.97$45www.hackshp.cn$44.98$44.97$39.92$39.91$35.40$35.41$35.40$31.41$27.86170khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.05.0b.u=e=.1236,d=/1u=.0809$68.75$55.62$45.00$45$45.00khdaw.com$36.41$29.463.0.025u=e=.1162;d=/1u=.0861$82.04$70.60课后答案网$60.79$60.76$60.79www.hackshp.cn$52.32$52.29$45.05$45$45.02$45.05$38.75$38.77$33.38$33.36$33.38$28.72$24.73171khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 2.a.Letpequaltheprobabilityofariseinthestockprice.Then,ifinvestorsarerisk-neutral:(p×0.15)+(1–p)×(–0.13)=0.10p=0.821Thepossiblestockpricesnextperiodare:$60×1.15=$69.00$60×0.87=$52.20LetXequalthebreak-evenexerciseprice.Thenthefollowingmustbetrue:khdaw.comX–60=(p)($0)+[(1–p)(X–52.20)]/1.10Thatis,thevalueoftheputifexercisedimmediatelyequalsthevalueoftheputifitisheldtonextperiod.SolvingforX,wefindthatthebreak-evenexercisepriceis$61.52.b.Iftheinterestrateisincreased,thevalueoftheputoptiondecreases.3.a.ThefuturestockpricesofMoriaMiningare:100课后答案网Withdividend80125Ex-dividend60105www.hackshp.cn487584131.25Letpequaltheprobabilityofariseinthestockprice.Then,ifinvestorsarerisk-neutral:(p×0.25)+(1–p)×(–0.20)=0.10p=0.67Now,calculatetheexpectedvalueofthecallinmonth6.?032.4200451.25172khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Ifstockpricedecreasesto$80inmonth6,thenthecallisworthless.Ifstockpriceincreasesto$125,then,ifitisexercisedatthattime,ithasavalueof($125–$80)=$45.Ifthecallisnotexercised,thenitsvalueis:(0.67×$51.25)+(0.33×$4)=$32.421.10Therefore,itispreferabletoexercisethecall.Thevalueofthecallinmonth0is:(0.67×4$5)+(0.33×$0)=$27.411.10khdaw.comb.ThefuturestockpricesofMoriaMiningare:100Withdividend80125Ex-dividend6410051.280125Letpequaltheprobabilityofariseinthepriceofthestock.Then,ifinvestorsarerisk-neutral:(p×0.25)+(1–p)×(–0.20)=0.10p=0.67课后答案网Now,calculatetheexpectedvalueofthecallinmonth6.?www.hackshp.cn027.4100045Ifstockpricedecreasesto$80inmonth6,thenthecallisworthless.Ifstockpriceincreasesto$125,then,ifitisexercisedatthattime,ithasavalueof($125–$80)=$45.Ifthecallisnotexercised,thenitsvalueis:(0.67×4$5)+(0.33×$0)=$27.411.10Therefore,itispreferabletoexercisethecall.Thevalueofthecallinmonth0is:(0.67×$45)+(0.33×$0)=$27.411.10173khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.a.ThepossiblepricesofBuffelheadstockandtheassociatedcalloptionvalues(showninparentheses)are:220(?)110440(?)(?)55220880(0)(55)(715)khdaw.comLetpequaltheprobabilityofariseinthestockprice.Then,ifinvestorsarerisk-neutral:p(1.00)+(1–p)(–0.50)=0.10p=0.4Ifthestockpriceinmonth6is$110,thentheoptionwillnotbeexercisedsothatitwillbeworth:[(0.4×$55)+(0.6×$0)]/1.10=$20Similarly,ifthestockpriceis$440inmonth6,then,ifitisexercised,itwillbeworth($440-$165)=$275.Iftheoptionisnotexercised,itwillbeworth:课后答案网[(0.4×$715)+(0.6×$55)]/1.10=$290Therefore,thecalloptionwillnotbeexercised,sothatitsvaluetodayis:[(0.4×www.hackshp.cn$290)+(0.6×$20)]/1.10=$116.36b.(i)Ifthepricerisesto$440:715−55Delta==1.0880−220(ii)Ifthepricefallsto$110:55−0Delta==0.33220−55c.Theoptiondeltais1.0whenthecalliscertaintobeexercisedandiszerowhenitiscertainnottobeexercised.Ifthecalliscertaintobeexercised,itisequivalenttobuyingthestockwithapartlydeferredpayment.Soaone-dollarchangeinthestockpricemustbematchedbyaone-dollarchangeintheoptionprice.Attheotherextreme,whenthecalliscertainnottobeexercised,itisvalueless,regardlessofthechangeinthestockprice.174khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com d.Ifthestockpriceis$110at6months,theoptiondeltais0.33.Therefore,inordertoreplicatethestock,webuythreecallsandlend,asfollows:InitialStockStockOutlayPrice=55Price=220Buy3calls-600165LendPV(55)-50+55+55-110+55+220ThisstrategyIsequivalentto:Buystock-110+55+2205.khdaw.coma.Yes,itisrationaltoconsidertheearlyexerciseofanAmericanputoption.b.ThepossiblepricesofBuffelheadstockandtheassociatedAmericanputoptionvalues(showninparentheses)are:220(?)110440(?)(?)55220880(165)(0)(0)课后答案网Letpequaltheprobabilityofariseinthestockprice.Then,ifinvestorsarerisk-neutral:p(1.00)+(1–p)(–0.50)=0.10p=0.4www.hackshp.cnIfthestockpriceinmonth6is$110,andiftheAmericanputoptionisnotexercised,itwillbeworth:[(0.4×$0)+(0.6×$165)]/1.10=$90Ontheotherhand,ifitisexercisedafter6months,itisworth$110.Thus,theinvestorshouldexercisetheputearly.Similarly,ifthestockpriceinmonth6is$440,andiftheAmericanputoptionisnotexercised,itwillbeworth:[(0.4×$0)+(0.6×$0)]/1.10=$0Ontheotherhand,ifitisexercisedafter6months,itwillcosttheinvestor$220.Theinvestorshouldnotexerciseearly.Finally,thevaluetodayoftheAmericanputoptionis:[(0.4×$0)+(0.6×$110)]/1.10=$60175khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.UnliketheAmericanputinpart(b),theEuropeanputcannotbeexercisedpriortoexpiration.Wenotedinpart(b)that,Ifthestockpriceinmonth6is$110,theAmericanputwouldbeexercisedbecauseitsvalueifexercised(i.e.,$110)isgreaterthanitsvalueifnotexercised(i.e.,$90).FortheEuropeanput,however,thevalueatthatpointis$90becausetheEuropeanputcannotbeexercisedearly.Therefore,thevalueoftheEuropeanputis:[(0.4×$0)+(0.6×$90)]/1.10=$49.096.a.Thefollowingtreeshowsstockprices,withoptionvaluesinparentheses:khdaw.com220(100.99)440Withdividend110415(275)85(1.82)Ex-dividend83042.5170207.5(0)(5)(42.5)(665)Wecalculatetheoptionvalueasfollows:1.Theoptionvaluesinmonth6,iftheoptionisnotexercised,are课后答案网computedasfollows:(0.4×$5)+(0.6×$0)=$1.821.10www.hackshp.cn(0.4×$665)+(0.6×$42.5)=$2651.10Ifthestockpriceinmonth6is$110,thenitwouldnotpaytoexercisetheoption.Ifthestockpriceinmonth6is$440,thenthecallisworth:($440–$165)=$275.Therefore,theoptionwouldbeexercisedatthattime.2.Workingbacktomonth0,wefindtheoptionvalueasfollows:(0.4×$275)+(0.6×$1.82)Optionvalue==$100.991.10176khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.IftheoptionwereEuropean,itwouldnotbepossibletoexerciseearly.Therefore,ifthepricerisesto$440atmonth6,thevalueoftheoptionis$265,not$275asisthecasefortheAmericanoption.Therefore,inthiscase,thevalueoftheEuropeanoptionislessthanthevalueoftheAmericanoption.ThevalueoftheEuropeanoptioniscomputedasfollows:(0.4×$265)+(0.6×$1.82)Optionvalue==$97.361.107.Thefollowingtree(seePracticeQuestion4)showsstockprices,withthevalueskhdaw.comfortheone-yearoptionvaluesinparentheses:220110440(55)(290)55220880(0)(55)(715)Theputoptionisworth$55inmonth6ifthestockpricefallsand$0ifthestockpricerises.Thus,witha6-monthstockpriceof$110,itpaystoexercisetheput(value=$55).Withapriceinmonth6of$440,theinvestorwouldnotexercise课后答案网theputsinceitwouldcost$275toexercise.Thevalueoftheoptioninmonth6,ifitisnotexercised,isdeterminedasfollows:www.hackshp.cn(0.4×$715)+(0.6×$55)=$2901.10Therefore,themonth0valueoftheoptionis:(0.4×$290)+(0.6×$55)Optionvalue==$135.451.10177khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.a.Thefollowingtreeshowsstockprices(withputoptionvaluesinparentheses):100(2.35)90.0(7.15)111.1(.55)81.0100123.4(21)(2)(0)khdaw.comLetpequaltheprobabilitythatthestockpricewillrise.Then,forarisk-neutralinvestor:(p×0.111)+(1–p)×(–0.10)=0.05p=0.71Ifthestockpriceinmonth6isC$111.1,thenthevalueoftheEuropeanputis:(0.71×C$0)+(0.29×C$2)=C$0.551.05Ifthestockpriceinmonth6isC$90.0,thenthevalueoftheputis:课后答案网(0.71×C$2)+(0.29×C$21)=C$7.151.05www.hackshp.cnSincethisisaEuropeanput,itcannotbeexercisedatmonth6.Thevalueoftheputatmonth0is:(0.71×C$0.55)+(0.29×C$7.15)=C$2.351.05b.SincetheAmericanputcanbeexercisedatmonth6,then,ifthestockpriceisC$90.0,theputisworth(C$102–C$90)=C$12ifexercised,comparedtoC$7.15ifnotexercised.Thus,thevalueoftheAmericanputinmonth0is:(0.71×C$0.55)+(0.29×C$12)=C$3.691.05178khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.a.P=200EX=180σ=0.223t=1.0rf=0.21d=log[P/PV(EX)]/σt+σt/21=log[200/(180/1.21)]/(0.223×1.0)+(0.223×1.0)/2=1.4388d=d−σt=1.4388−(0.223×1.0)=1.215821N(d1)=N(1.4388)=0.9249N(d2)=N(1.2158)=0.8880Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]khdaw.com=[0.9249×200]–[0.8880×(180/1.21)]=$52.88b.σh0.2231.01+upsidechange=u=e=e=1.24981+downsidechange=d=1/u=1/1.2498=0.8001Letpequaltheprobabilitythatthestockpricewillrise.Then,forarisk-neutralinvestor:(p×0.25)+(1–p)×(–0.20)=0.21p=0.91Inoneyear,thestockpricewillbeeither$250or$160,andtheoptionvalueswillbe$70or$0,respectively.Therefore,thevalueoftheoptionis:课后答案网(0.91×70)+(0.09×0)=$52.641.21c.www.hackshp.cnσh0.2230.51+upsidechange=u=e=e=1.17081+downsidechange=d=1/u=1/1.1708=0.8541Letpequaltheprobabilitythatthestockpricewillrise.Then,forarisk-neutralinvestor:(p×0.171)+(1–p)×(–0.146)=0.10p=0.776179khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Thefollowingtreegivesstockprices,withoptionvaluesinparentheses:200(52.63)170.8234.2(14.11)(70.53)145.9200.0274.2(0)(20)(94.2)Optionvaluesarecalculatedasfollows:(0.776×$20)+(0.224×$0)1khdaw.com.=$14.111.102.(0.224×$20)+(0.776×$94.2)=$70.531.103.(0.224×$14.11)+(0.776×$70.53)=$52.631.10spreadofpossibleoptionpricesd.(i)Optiondelta=spreadofpossiblestockprices课后答案网70.53−14.11Optiondelta==0.89234.2−170.8Toreplicateacall,buy0.89sharesandborrow:www.hackshp.cn[(0.89×$170.8)–$14.11]/1.10=$125.3794.2−20(ii)Optiondelta==1.00274.2−200Toreplicateacall,buyoneshareandborrow:[(1.0×$274.2)–$94.2]/1.10=$163.6420−0(iii)Optiondelta==0.37200−145.9Toreplicateacall,buy0.37sharesandborrow:[(0.37×$200)–$20]/1.10=$49.09180khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10.Toholdtimetoexpirationconstant,wewilllookatasimpleone-periodbinomialproblemwithdifferentstartingstockprices.Herearethepossiblestockprices:1001105020055220Nowconsidertheeffectonoptiondelta:CurrentStockPriceOptionDeltas100110In-the-money(EX=60)140/150=0.93160/165=0.97At-the-money(EX=100)100/150=0.67120/165=0.73khdaw.comOut-of-the-money(EX=140)60/150=0.4080/165=0.48Notethat,foragivendifferenceinstockprice,out-of-the-moneyoptionsresultinalargerchangeintheoptiondelta.Ifyouwanttominimizethenumberoftimesyourebalanceanoptionhedge,usein-the-moneyoptions.11.a.Thecalloption.(Youwoulddelaytheexerciseoftheputuntilafterthedividendhasbeenpaidandthestockpricehasdropped.)b.Theputoption.(Youneverexerciseacallifthestockpriceisbelowexerciseprice.)课后答案网c.Theputwhentheinterestrateishigh.(Youcaninvesttheexerciseprice.)12.a.Whenyouexerciseacall,youpurchasethestockfortheexerciseprice.www.hackshp.cnNaturally,youwanttomaximizewhatyoureceiveforthisprice,andsoyouwouldexerciseonthewith-dividenddateinordertocapturethedividend.b.Whenyouexerciseaput,yourgainisthedifferencebetweenthepriceofthestockandtheamountyoureceiveuponexercise,i.e.,theexerciseprice.Therefore,inordertomaximizeyourprofit,youwanttominimizethepriceofthestockandsoyouwouldexerciseontheex-dividenddate.13.Internetexercise;answerswillvary.181khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 14.a.Thevalueofthealternativeshare=(V/N)whereVisthetotalvalueofequity(commonstockpluswarrants)andNisthenumberofsharesoutstanding.ForElectricBassoon:V20,000+5,000==$12.50N2,000Whenvaluingthewarrant,weusethestandarddeviationofthisalternative‘share.’Thiscanbeobtainedfromthefollowingrelationship(seechapterfootnote21):Theproportionofthefirmfinancedbyequity(calculatedbeforetheissueofthewarrant)timesthestandarddeviationofstockreturns(calculatedbeforetheissueofthewarrant)khdaw.comisequaltotheproportionofthefirmfinancedbyequity(calculatedaftertheissueofthewarrant)timesthestandarddeviationofthealternativeshare.b.Thevalueofthewarrantisequaltothevalueof[1/(1+q)]calloptionsonthealternativeshare,whereqisthenumberofwarrantsissuedpershareoutstanding.ForElectricBassoon:q=1,000/2,000=0.5Therefore:1/(1+q)=1/1.5=0.67Thevalueofthewarrantis:(0.67课后答案网×$6)=$4Atthecurrentpriceof$5thewarrantsareovervalued.15.a.P=24.47EX=24.47σ=0.42t=7.0rf=0.039www.hackshp.cnd=log[P/PV(EX)]/σt+σt/21=log[24.47/(24.47/1.039)]/(0.42×7.0)+(0.42×7.0)/2=0.7966d=d−σt=0.7966−(0.42×7.0)=−0.314621N(d1)=N(0.7966)=0.7872N(d2)=N(–0.3146)=0.3765Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]=[0.7872×24.47]–[0.3765×(24.47/1.039)]=$12.11Priceperoption×numberofoptions=$12.11×254million=$3.076billionb.AnswerswillvarydependingontheremainingtimetoexpirationofthewarrantsandthecurrentpriceofKindredHealthcarecommonstock.16.Individualexercise;answerswillvary.182khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Fortheone-periodbinomialmodel,assumethattheexercisepriceoftheoptions(EX)isbetweenuandd.Then,thespreadofpossibleoptionpricesis:Forthecall:[(u–EX)–0]Fortheput:[(d–EX)–0]Theoptiondeltasare:Optiondelta(call)=[(u–EX)–0]/(u–d)=(u–EX)/(u–d)Optiondelta(put)=[(d–EX)–0]/(u–d)=(d–EX)/(u–d)Therefore:khdaw.com[Optiondelta(call)–1]=[(u–EX)/(u–d)]–1=[(u–EX)]/(u–d)]–[(u–d)/(u–d)]=[(u–EX)–(u–d)]/(u–d)=[d–EX]/(u–d)=Optiondelta(put)2.Iftheexercisepriceofacalliszero,thentheoptionisequivalenttothestock,sothat,inordertoreplicatethestock,youwouldbuyonecalloption.Therefore,iftheexercisepriceiszero,theoptiondeltaisone.Iftheexercisepriceofacallis课后答案网indefinitelylarge,thentheoptionvalueremainslowevenifthereisalargepercentagechangeinthepriceofthestock.Therefore,thedollarchangeinthevalueoftheoptionwillbemuchsmallerthanthedollarchangeinthepriceofthestock,sothattheoptiondeltaisclosetozero.Betweenthesetwoextremecases,theoptiondeltavariesbetweenzeroandone.www.hackshp.cn3.Bothoftheseannouncementsmayconveyinformationaboutcompanyprospects,andtherebyaffectthepriceofthestock.But,whenthedividendispaid,stockpricedecreasesbyanamountapproximatelyequaltotheamountofthedividend.Thispricedecreasereducesthevalueoftheoption.Ontheotherhand,astockrepurchaseatthemarketpricedoesnotaffectthepriceofthestock.Therefore,youshouldhopethattheboardwilldecidetoannounceastockrepurchaseprogram.183khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.a.Asthelifeofthecalloptionincreases,thepresentvalueoftheexercisepricebecomesinfinitesimal.Thustheonlydifferencebetweenthecalloptionandthestockisthattheoptionholdermissesoutonanydividends.Ifdividendsarenegligible,thevalueoftheoptionapproachesitsupperbound,i.e.,thestockprice.b.Whileitistruethatthevalueofanoptionapproachestheupperboundasmaturityincreasesanddividendpaymentsonthestockdecrease,astockthatneverpaysdividendsisvalueless.khdaw.com课后答案网www.hackshp.cn184khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER22RealOptionsAnswerstoPracticeQuestions1.a.Afive-yearAmericancalloptiononoil.Theinitialexercisepriceis$50abarrel,buttheexercisepricerisesby5percentperyear.b.AnAmericanputoptiontoabandontherestaurantatanexercisepriceof$5million.Therestaurant’scurrentvalueis($700,000/r).Theannualstandarddeviationofthechangesinthevalueoftherestaurantasagoingconcernis15percent.khdaw.comc.Aputoption,asin(b),exceptthattheexercisepriceshouldbeinterpretedas$5millioninrealestatevalueplusthepresentvalueofthefuturefixedcostsavoidedbyclosingdowntherestaurant.Thus,theexercisepriceis:$5,000,000+($300,000/0.10)=$8,000,000.Note:TheunderlyingassetisnowPV(revenue–variablecost),withannualstandarddeviationof10.5percent.d.Acomplexoptionthatallowsthecompanytoabandontemporarily(anAmericanput)and(iftheputisexercised)tosubsequentlyrestart(anAmericancall).e.Anin-the-moneyAmericanoptiontochoosebetweentwoassets;thatis,课后答案网thedevelopercandeferexerciseandthendeterminewhetheritismoreprofitabletobuildahoteloranapartmentbuilding.Bywaiting,however,thedeveloperlosesthecashflowsfromimmediatedevelopment.www.hackshp.cnf.AcalloptionthatallowsAirFrancetofixthedeliverydateandprice.2.a.P=467EX=800σ=0.35t=3.0rf=0.10d=log[P/PV(EX)]/σt+σt/213=log[467/(800/1.10)]/(0.35×3.0)+(0.35×3.0)/2=−0.1132d=d−σt=−0.1132−(0.35×3.0)=−0.719421N(d1)=N(-0.1132)=0.4550N(d2)=N(-0.7194)=0.2360Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]3=[0.4550×467]–[0.2360×(800/1.10)]=$70.64185khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.P=500EX=900σ=0.35t=3.0rf=0.10d=log[P/PV(EX)]/σt+σt/213=log[500/(900/1.10)]/(0.35×3.0)+(0.35×3.0)/2=−0.1948d=d−σt=−0.1948−(0.35×3.0)=−0.801021N(d1)=N(-0.1948)=0.4228N(d2)=N(-0.8010)=0.2116Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]3=[0.4228×500]–[0.2116×(900/1.10)]=$68.33khdaw.comc.P=467EX=900σ=0.20t=3.0rf=0.10d=log[P/PV(EX)]/σt+σt/213=log[467/(900/1.10)]/(0.20×3.0)+(0.20×3.0)/2=−0.8953d=d−σt=−0.8953−(0.20×3.0)=−1.241721N(d1)=N(-0.8953)=0.1853N(d2)=N(-1.2417)=0.1072Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]课后答案网3=[0.1853×467]–[0.1072×(900/1.10)]=$14.073.P=1.7EX=2www.hackshp.cnσ=0.15t=1.0rf=0.12d=log[P/PV(EX)]/σt+σt/21=log[1.7/(2/1.121)]/(0.15×1.0)+(0.15×1.0)/2=−0.2529d=d−σt=−0.2529−(0.15×1.0)=−0.402921N(d1)=N(-0.2529)=0.4002N(d2)=N(-0.4029)=0.3435Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]1=[0.4002×1.7]–[0.3435×(2/1.12)]=$0.0669millionor$66,900186khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.TheassetvaluefromPracticeQuestion3isnowreducedbythepresentvalueoftherents:PV(rents)=0.15/1.12=0.134Therefore,theassetvalueisnow(1.7–0.134)=1.566P=1.566EX=2σ=0.15t=1.0rf=0.12d=log[P/PV(EX)]/σt+σt/211=log[1.566/(2/1.12)]/(0.15×1.0)+(0.15×1.0)/2=−0.8003d=d−σt=−0.8003−(0.15×1.0)=−0.950321N(dkhdaw.com1)=N(-0.8003)=0.2118N(d2)=N(-0.9503)=0.1710Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]1=[0.2118×1.566]–[0.1710×(2/1.12)]=$0.0263millionor$26,3005.a.Ingeneral,anincreaseinvariabilityincreasesthevalueofanoption.Hence,ifthepricesofbothoilandgaswereveryvariable,theoptiontoburneitheroilorgaswouldbemorevaluable.b.Ifthepricesofcoalandgaswerehighlycorrelated,thentherewouldbeminimaladvantagetoshiftingfromonetotheother,andhence,theoption课后答案网wouldbelessvaluable.www.hackshp.cn187khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.a.Thevaluesinthebinomialtreebelowaretheex-dividendvalues,withtheoptionvaluesshowninparentheses.3428(978)31622825(375)(712)29202815(365)(491)260527002318(0)khdaw.com(208)(327)2805(355)24052595(115)(202)2309(0)2300(0)2136(0)1892(0)b.Theoptionvaluesinthebinomialtreeabovearecomputedusingtherisk课后答案网neutralmethod.Letpequaltheprobabilityofariseinassetvalue.Then,ifinvestorsarerisk-neutral:p(0.10)+(1–p)(–0.0909)=0.02p=0.581www.hackshp.cnIf,forexample,assetvalueatmonth6is$3,162(thisisthevalueafterthe$50cashflowispaidtothecurrentowners),thentheoptionvaluewillbe:[(0.419×375)+(0.581×978)]/1.02=$711Iftheoptionisexercisedatmonth6whenassetvalueis$3,212thentheoptionvalueis:$3,212–$2,500=$712Therefore,theoptionvalueis$712.Ateachassetvalueinmonth3andinmonth6,theoptionvalueiftheoptionisnotexercisedisgreaterthanorequaltotheoptionvalueiftheoptionisexercised.(Theoneminorexceptionhereisthecalculationabovewhereweshowthatthevalueis$712iftheoptionisexercisedand$711ifitisnotexercised.Duetorounding,thisdifferencedoesnotaffectanyofourresultsandconclusions.)Therefore,undertheconditionspecifiedinpart(b),youshouldnotexercisetheoptionnowbecauseitsvalueifnotexercised($327)isgreaterthanitsvalueifexercised($200).188khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Ifyouexercisetheoptionearly,itisworththewith-dividendvalueless$2,500.Forexample,ifyouexerciseinmonth3whenthewith-dividendvalueis$2,970,theoptionwouldbeworth:($2,970-$2,500)=$470.Sincetheoptionisworth$491ifnotexercised,youarebetteroffkeepingtheoptionopen.Ateachpointbeforemonth9,theoptionisworthmoreunexercisedthanexercised.(Asnotedaboveinpart(b)thereisoneminorexceptiontothisconclusion.)Therefore,youshouldwaitratherthanexercisetoday.Thevalueoftheoptiontodayis$327,asshowninthebinomialtreeabove.7.a.TechnologyBisequivalenttoTechnologyAlessacertainpaymentof$0.5million.SincePV(A)=$11.5millionthen,ignoringabandonmentkhdaw.comvalue:PV(B)=PV(A)–PV(certain$0.5million)=$11.5million–($0.5million/1.07)=$11.03millionb.Assumethat,ifyouabandonTechnologyB,youreceivethe$10millionsalvagevaluebutnooperatingcashflows.Then,ifdemandissluggish,youshouldexercisetheputoptionandreceive$10million.Ifdemandisbuoyant,youshouldcontinuewiththeprojectandreceive$18million.So,inyear1,theputwouldbeworth:($10million–$8million)=$2millionifdemandissluggishand$0ifdemandisbuoyant.Wecanvaluetheputusingtherisk-neutralmethod.Ifdemandisbuoyant,课后答案网thenthegaininvalueis:($18million/$11.03million)–1=63.2%Ifdemandissluggish,thelossis:($8million/$11.03million)–1=–27.5%Letpequaltheprobabilityofariseinassetvalue.Then,ifinvestorsarerisk-neutral:www.hackshp.cnp(0.632)+(1-p)(-0.275)=0.07p=0.38Therefore,thevalueoftheoptiontoabandonis:[(0.62×0)+(0.38×2)]/1.07=$0.71million189khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.a.$28.08$22.46$18.71$17.97$18.71$14.38$14.97$12.47$11.50$11.97$12.47$9.97khdaw.com$9.58$8.31$7.98$8.31$6.65$5.54b.Theonlycaseinwhichonewouldwanttoabandonattheendoftheyearisifprojectvalueis$5.54(i.e.,ifvaluedeclinesineachofthefourquarters).Inthiscase,thevalueoftheabandonmentoptionwouldbe:($7–$5.54)=$1.46课后答案网Letpequaltheprobabilityofariseinassetvalue.Then,usingthequarterlyrisk-freerate,wefindthat,ifinvestorsarerisk-neutral:p(0.25)+(1-p)(-0.167)=0.017www.hackshp.cnp=0.441Therisk-neutralprobabilityofafallinvalueineachofthefourquartersis:4(1–0.441)=0.0976Theexpectedrisk-neutralvalueoftheabandonmentoptionis:0.0976×1.46=0.1425Thepresentvalueoftheabandonmentoptionis:(0.0976×1.46)/1.07=0.1332or$133,200190khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.ThevaluationapproachproposedbyJoshKiddingwillnotgivetherightanswerbecauseitignoresthefactthatthediscountratewithinthetreechangesastimepassesandthevalueoftheprojectchanges.10.LiveExcelproblem;approacheswillvary.However,answersshoulddemonstratetherelationshipsidentifiedinTable20.2.khdaw.com课后答案网www.hackshp.cn191khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Youdon’ttakedeliveryofthenewplantuntilmonth36.Thinkofthesituationonemonthbeforecompletion.Youhaveacalloptiontogettheplantbypayingthefinalmonth’sconstructioncoststothecontractors.Onemonthbeforethat,youhaveanoptionontheoptiontobuytheplant.Theexercisepriceofthissecondcalloptionistheconstructioncostinthenexttolastmonth.Andsoon.Alternatively,youcanthinkofthefirmasagreeingtoconstructionandputtingthepresentvalueoftheconstructioncostinanescrowaccount.Eachmonth,thefirmhastheoptiontoabandontheprojectandreceivetheunspentbalanceintheescrowaccount.Thus,inmonth1,youhaveaputoptionontheprojectwithankhdaw.comexercisepriceequaltotheamountintheescrowaccount.Ifyoudonotexercisetheputinmonth1,yougetanotheroptiontoabandonitinmonth2.Theexercisepriceofthisoptionistheamountintheescrowaccountinmonth2.Andsoon.2.a.AnincreaseinPVGOincreasesthestock’srisk.SincePVGOisaportfolioofexpansionoptions,ithashigherriskthantheriskoftheassetscurrentlyinplace.b.ThecostofcapitalderivedfromtheCAPMisnotthecorrecthurdlerateforinvestmentstoexpandthefirm’splantandequipment,ortointroducenewproducts.Theexpectedreturnwillrefl课后答案网ecttheexpectedreturnontherealoptionsaswellastheassetsinplace.Consequently,theratewillbetoohigh.www.hackshp.cn192khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER23ValuingGovernmentBondsAnswerstoPracticeQuestions1.Thekeyhereistofindacombinationofthesetwobonds(i.e.,aportfolioofbonds)thathasacashflowonlyatt=6.Then,knowingthepriceoftheportfolioandthecashflowatt=6,wecancalculatethe6-yearspotrate.Webeginbyspecifyingthecashflowsofeachbondandusingtheseandtheiryieldstocalculatetheircurrentprices:InvestmentYieldC1...C5C6Pricekhdaw.com6%bond12%60...601,060$753.3210%bond8%100...1001,100$1,092.46Fromthecashflowsinyearsonethroughfive,itisclearthattherequiredportfolioconsistsofone6%bondminus60%ofone10%bond,i.e.,weshouldbuytheequivalentofone6%bondandselltheequivalentof60%ofone10%bond.Thisportfoliocosts:$753.32–(0.6×$1,092.46)=$97.84Thecashflowforthisportfolioisequaltozeroforyearsonethroughfiveand,foryear6,isequalto:$1,060–(0.6课后答案网×1,100)=$400Thus:6$97.84×(1+r6)=400r6=0.2645=26.45%www.hackshp.cn2.Downwardsloping.Thisisbecausehighcouponbondsprovideagreaterproportionoftheircashflowsintheearlyyears.Inessence,ahighcouponbondisa‘shorter’bondthanalowcouponbondofthesamematurity.3.Usingthegeneralrelationshipbetweenspotandforwardrates,wehave:2(1+r2)=(1+r1)×(1+f2)=1.0600×1.0640⇒r2=0.0620=6.20%(1+r3223)=(1+r2)×(1+f3)=(1.0620)×1.0710⇒r3=0.0650=6.50%(1+r4334)=(1+r3)×(1+f4)=(1.0650)×1.0730⇒r4=0.0670=6.70%(1+r5445)=(1+r4)×(1+f5)=(1.0670)×1.0820⇒r5=0.0700=7.00%Iftheexpectationshypothesisholds,wecaninfer—fromthefactthattheforwardratesareincreasing—thatspotinterestratesareexpectedtoincreaseinthefuture.193khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.Inordertolockinthecurrentlyexistingforwardrateforyearfive(f5),thefirmshould:°Borrowthepresentvalueof$100million.Becausethismoneywillbereceivedinfouryears,thisborrowingisatthefour-yearspotrate:r4=6.70%°Investthisamountforfiveyears,atthefive-yearspotrate:r5=7.00%Thus,thecashflowsare:4Today:Borrow($100million/1.0670)=$77.151millionInvest$77.151millionfor5yearsat7.00%Netcashflow:Zero4khdaw.comInfouryears:Repayloan:($77.151million×1.0670)=$100milliondollarsNetcashflow:–$100millionInfiveyears:Receiveamountofinvestment:5($77.151million×1.0700)=$108.2millionNetcashflow:+$108.2millionNotethatthecashflowsfromthisstrategyareexactlywhatonewouldexpectfromsigningacontracttodaytoinvest$100millioninfouryears,foratimeperiodofoneyear,attoday’sforwardrateforyear5(8.20%).With$108.2millionavailable,thefirmcancoverthepaymentof$107millionatt=5.课后答案网5.Wemakeuseoftheusualdefinitionoftheinternalrateofreturntocalculatetheyieldtomaturityforeachbond.5%CouponBond:www.hackshp.cn505050501050NPV=−920.70+++++=02345(1+r)(1+r)(1+r)(1+r)(1+r)r=0.06930=6.930%7%CouponBond:707070701070NPV=−1003.10+++++=02345(1+r)(1+r)(1+r)(1+r)(1+r)r=0.06925=6.925%12%CouponBond:1201201201201120NPV=−1209.20+++++=02345(1+r)(1+r)(1+r)(1+r)(1+r)r=0.06910=6.910%194khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Assumingthatthedefaultriskisthesameforeachbond,onemightbetemptedtoconcludethatthebondwiththehighestyieldisthebestinvestment.However,weknowthattheyieldcurveisrising(thespotratesarethosefoundinQuestion3)andthat,becausethebondshavedifferentcouponrates,theirdurationsaredifferent.5%CouponBond:1(50)2(50)3(50)4(50)5(1050)++++23451.0601.0621.0651.0671.070DUR=920.70DUR=4157.5/920.70=4.52yearskhdaw.com7%CouponBond:1(70)2(70)3(70)4(70)5(1070)++++1.0601.06221.06531.06741.0705DUR=1003.10DUR=4394.5/1003.10=4.38years12%CouponBond:1(120)2(120)3(120)4(120)5(1120)++++1.060课后答案网1.06221.06531.06741.0705DUR=1209.20DUR=4987.1/1209.20=4.12yearswww.hackshp.cnThus,thebondwiththelongestdurationisalsothebondwiththehighestyieldtomaturity.Thisispreciselywhatisexpected,giventhattheyieldcurveisrising.Weconcludethatthebondsareequallyattractive.6.a.&b.YearDiscountFactorForwardRate11/1.05=0.9522221/(1.054)=0.900(1.054/1.05)–1=0.0580=5.80%33231/(1.057)=0.847(1.057/1.054)–1=0.0630=6.30%44341/(1.059)=0.795(1.059/1.057)–1=0.0650=6.50%55451/(1.060)=0.747(1.060/1.059)–1=0.0640=6.40%195khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.1.5%,two-yearnote:$50$1050PV=+=$992.7921.05(1.054)2.5%,five-yearnote:$50$50$50$50$1050PV=++++=$959.3423451.05(1.054)(1.057)(1.059)(1.060)3.10%,five-yearnote:$100$100$100$100$1100PV=++++=$1,171.432345khdaw.com1.05(1.054)(1.057)(1.059)(1.060)d.First,wecalculatetheyieldforeachofthetwobonds.Forthe5%bond,thismeanssolvingforrinthefollowingequation:$50$50$50$50$1050$959.34=++++23451+r(1+r)(1+r)(1+r)(1+r)r=0.05964=5.964%Forthe10%bond:$100$100$100$100$1100$1171.43=++++23451+r(1+r)(1+r)(1+r)(1+r)课后答案网r=0.05937=5.937%Theyielddependsuponboththecouponpaymentandthespotrateatthetimeofthecouponpayment.The10%bondhasaslightlygreaterproportionofitstotalpaymentscomingearlier,wheninterestratesarelow,www.hackshp.cnthandoesthe5%bond.Thus,theyieldofthe10%bondisslightlylower.e.Theyieldtomaturityonafive-yearzerocouponbondisthefive-yearspotrate,here6.00%.f.First,wefindthepriceofthefive-yearannuity,assumingthattheannualpaymentis$1:11111PV=++++=$4.241723451.05(1.054)(1.057)(1.059)(1.060)196khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Nowwefindtheyieldtomaturityforthisannuity:111114.2417=++++23451+r(1+r)(1+r)(1+r)(1+r)r=0.0575=5.75%g.Theyieldonthefive-yearTreasurynoteliesbetweentheyieldonafive-yearzero-couponbondandtheyieldona5-yearannuitybecausethecashflowsoftheTreasurybondliebetweenthecashflowsoftheseothertwofinancialinstruments.Thatis,theannuityhasfixed,equalpayments,thezero-couponbondhasonepaymentattheend,andthebond’spaymentsareacombinationofthese.khdaw.com7.A6-yearspotrateof4.8percentimpliesanegativeforwardrate:65(1.048/1.06)–1=–0.010=–1.0%Tomakemoney,youcouldborrow$1,000for6yearsat4.8percentandlend$990for5yearsat6percent.Thefuturevalueoftheamountborrowedis:6FV6=$1,000×(1.048)=$1,324.85Thefuturevalueoftheamountloanedis:5FV5=$990×(1.06)=$1,324.84课后答案网Thisensuresenoughmoneytorepaytheloanbyholdingcashoverfromyear5toyear6,andprovidesanimmediate$10inflow.Theminimumsensibleratesatisfiestheconditionthattheforwardrateis0%:(1+r6/(1.06)www.hackshp.cn5=1.006)Thisimpliesthatr6=4.976percent.8.a.Undertheexpectationstheory,theexpectedspotrateequalstheforwardrate,whichisequalto:54(1.06/1.059)-1=0.064=6.4percentb.Iftheliquidity-preferencetheoryiscorrect,theexpectedspotrateislessthan6.4percent.c.Ifthetermstructurecontainsaninflationuncertaintypremium,theexpectedspotislessthan6.4percent.197khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.Ingeneral,yieldchangeshavethegreatestimpactonlong-maturity,low-couponbonds.10.Thedurationiscomputedinthetablebelow:ProportionProportionPVofTotalYearCtofTotal@2.75%ValuexValueTime130.0029.19710.028930.02893230.0028.41570.028150.05630330.0027.65510.027400.08220khdaw.com41030.00924.08070.915523.66209Totals1009.34863.8295211.Thecalculationsareshowninthetablesbelow:ProportionProportionofYearCtPV(Ct)ofTotalTotalValuexValueTime180.0077.860.0650.065280.0075.780.0630.127380.0073.750.0620.18541080.00968.940.810课后答案网3.24050.000.0000.00060.000.0000.00070.000.0000.0008www.hackshp.cn0.000.0000.00090.000.0000.000100.000.0000.000V=1196.321.0003.616=Duration(years)Note:3.520=VolatilityYield%2.75198khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ProportionProportionofYearCtPV(Ct)ofTotalTotalValuexValueTime155.0052.380.0510.051255.0049.890.0490.098355.0047.510.0470.14041055.00867.950.8533.41150.000.0000.00060.000.0000.00070.000.0000.00080.000.0000.00090.000.0000.000khdaw.com100.000.0000.000V=1017.731.0003.701=Duration(years)Note:3.525=VolatilityYield%5.0012.Thedurationofaperpetualbondis:[(1+yield)/yield]Thedurationofaperpetualbondwithayieldof5%is:D5=1.05/0.05=21yearsThedurationofaperpetualbondyielding10%is:D10=1.10/0.10=11years课后答案网Becausethedurationofazero-couponbondisequaltoitsmaturity,the15-yearzero-couponbondhasadurationof15years.Thus,comparingthe5%bondandthezero-couponbond,the5%bondhasthewww.hackshp.cnlongerduration.Comparingthe10%bondandthezero,thezerohasalongerduration.199khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 13.Thedurationofthecontractiscomputedasfollows:ProportionofProportionofYearCtPV(Ct)TotalValuexTotalValueTime1150,000137,614.680.2360.2362150,000126,252.000.2160.4333150,000115,827.520.1990.5964150,000106,263.780.1823.7295150,00097,489.710.1670.835V=583,447.691.0002.828=Duration(years)khdaw.comNote:2.595=VolatilityYield%9.00Alternatively,thefollowingformulacanbeusedtocomputethedurationofalevelannuity:1+yT1.095−=−=12.111−9.283=2.828yearsT5y(1+y)−10.09(1.09)−1Thevolatilityis2.595.Thistellsusthata1%variationintheinterestratewillcausethecontract’svaluetochangeby2.595%.Onaverage,then,a0.5%increaseinyieldwillcausethecontract’svaluetofallby1.298%.Thepresentvalueoftheannuityis$583,447.69sothevalueofthecontractdecreasesby:(0.01298×$583,447.69)=$7,573.15课后答案网14.Ifinterestratesriseandthemedium-termbondpricedecreasesto$90.75insteadof$95,thenitwillbeunderpricedrelativetotheshort-termandlong-termwww.hackshp.cnbonds.Investorswouldbuythemedium-termbondatthelowpriceinordertogainfromthedifferencebetweenitsvalueanditsprice.Thiswillincreasethepriceanddecreasetheyield.Ifthebondpriceincreasedto$115.50insteadof$111.50,investorswouldsellthemedium-termbondbecauseitisoverpricedrelativetotheshort-termandlong-termbonds.200khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Arbitrageopportunitiescanbeidentifiedbyfindingsituationswheretheimpliedforwardratesorspotratesaredifferent.Webeginwiththeshortest-termbond,BondG,whichhasatwo-yearmaturity.SinceGisazero-couponbond,wedeterminethetwo-yearspotratedirectlybyfindingtheyieldforBondG.Theyieldis9.5percent,sotheimpliedtwo-yearspotrate(r2)is9.5percent.UsingthesameapproachforBondA,wefindthatthethree-yearspotrate(r3)is10.0percent.NextweuseBondsBandDtofindthefour-yearspotrate.Thefollowingpositioninthesebondsprovidesacashpayoffonlyinyearfour:khdaw.comalongpositionintwoofBondBandashortpositioninBondD.Cashflowsforthispositionare:[(–2×$842.30)+$980.57]=–$704.03today[(2×$50)–$100]=$0inyears1,2and3[(2×$1050)–$1100]=$1000inyear4Wedeterminethefour-yearspotratefromthispositionasfollows:$1000$704.03=4(1+r)4r4=0.0917=9.17%Next,weuser2,r3课后答案网andr4withoneofthefour-yearcouponbondstodeterminer1.ForBondC:$120$120$120$1120$120$1,065.28=+++=+$978.742341+r(1.095)(1.100)(1.0917)1+rwww.hackshp.cn11r1=0.3867=38.67%Now,inordertodeterminewhetherarbitrageopportunitiesexist,weusethesespotratestovaluetheremainingtwofour-yearbonds.Thisproducesthefollowingresults:forBondB,thepresentvalueis$854.55,andforBondD,thepresentvalueis$1,005.07.Sinceneitherofthesevaluesequalsthecurrentmarketpriceoftherespectivebonds,arbitrageopportunitiesexist.Similarly,thespotratesderivedaboveproducethefollowingvaluesforthethree-yearbonds:$1,074.22forBondEand$912.77forBondF.201khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 2.WebeginwiththedefinitionofdurationasappliedtoabondwithyieldrandanannualpaymentofCinperpetuity1C2C3CtC+++?++?1+r(1+r)2(1+r)3(1+r)tDUR=CCCC+++?++?23t1+r(1+r)(1+r)(1+r)WefirstsimplifybydividingboththenumeratorandthedenominatorbyC:123t+++?++?23t(1+r)(1+r)(1+r)(1+r)DUR=khdaw.com1111+++?++?23t1+r(1+r)(1+r)(1+r)Thedenominatoristhepresentvalueofaperpetuityof$1peryear,whichisequalto(1/r).Tosimplifythenumerator,wefirstdenotethenumeratorSandthendivideSby(1+r):S123t=+++?++?234t+1(1+r)(1+r)(1+r)(1+r)(1+r)Notethatthisnewquantity[S/(1+r)]isequaltothesquareofdenominatorinthedurationformulaabove,thatis:课后答案网2S⎛1111⎞=⎜⎜+2+3+?+t+?⎟⎟(1+r)⎝1+r(1+r)(1+r)(1+r)⎠www.hackshp.cnTherefore:2S⎛1⎞1+r=⎜⎟⇒S=2(1+r)⎝r⎠rThus,foraperpetualbondpayingCdollarsperyear:1+r11+rDUR=2×=r(1/r)r202khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.Webeginwiththedefinitionofdurationasappliedtoacommonstockwithyieldranddividendsthatgrowataconstantrateginperpetuity:1C(1+g)2C(1+g)23C(1+g)3tC(1+g)t+2+3+?+t+?1+r(1+r)(1+r)(1+r)DUR=23tC(1+g)C(1+g)C(1+g)C(1+g)+++?++?23t1+r(1+r)(1+r)(1+r)Wefirstsimplifybydividingeachtermby[C(1+g)]:2t−112(1+g)3(1+g)t(1+g)+++?++?23t1+r(1+r)(1+r)(1+r)DUR=2t−111+g(1+g)(1+g)khdaw.com+++?++?23t1+r(1+r)(1+r)(1+r)Thedenominatoristhepresentvalueofagrowingperpetuityof$1peryear,whichisequalto[1/(r-g)].Tosimplifythenumerator,wefirstdenotethenumeratorSandthendivideSby(1+r):2t−2S12(1+g)3(1+g)t(1+g)=+++?++?234t+1(1+r)(1+r)(1+r)(1+r)(1+r)Notethatthisnewquantity[S/(1+r)]isequaltothesquareofdenominatorinthedurationformulaabove,thatis:课后答案网⎛2t−12S11+g(1+g)(1+g)⎞=⎜+++?++?⎟⎜23t⎟(1+r)⎝1+r(1+r)(1+r)(1+r)⎠www.hackshp.cnTherefore:2S⎛1⎞1+r=⎜⎟⇒S=(1+r)⎜r−g⎟(r−g)2⎝⎠Thus,foraperpetualbondpayingCdollarsperyear:1+r11+rDUR=2×=(r−g)[1/(r−g)]r−g203khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.a.Wemakeuseoftheone-yearTreasurybillinformationinordertodeterminetheone-yearspotrateasfollows:$100$93.46=1+r1r1=0.0700=7.00%Thefollowingpositionprovidesacashpayoffonlyinyeartwo:alongpositionintwenty-fivetwo-yearbondsandashortpositioninoneone-yearTreasurybill.Cashflowsforthispositionare:[(–25×$94.92)+(1×$93.46)]=–$2,279.54today[(25×$4)–(1×$100)]=$0inyear1khdaw.com(25×$104)=$2,600inyear2Wedeterminethetwo-yearspotratefromthispositionasfollows:$2,600$2,279.54=2(1+r)2r2=0.0680=6.80%Theforwardratef2iscomputedasfollows:2f2=[(1.0680)/1.0700]–1=0.0660=6.60%Thefollowingpositionprovidesacashpayoffonlyinyearthree:alongpositioninthethree-yearbondandashortpositionequalto(8/104)课后答案网timesapackageconsistingofaone-yearTreasurybillandatwo-yearbond.Cashflowsforthispositionare:[(–1×www.hackshp.cn$103.64)+(8/104)×($93.46+$94.92)]=–$89.15today[(1×$8)–(8/104)×($100+$4)]=$0inyear1[(1×$8)–(8/104)×$104]=$0inyear21×$108=$108inyear3Wedeterminethethree-yearspotratefromthispositionasfollows:$108$89.15=3(1+r)3r3=0.0660=6.60%Theforwardratef3iscomputedasfollows:32f3=[(1.0660)/(1.0680)]–1=0.0620=6.20%204khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Wemakeuseofthespotandforwardratestocalculatethepriceofthe4percentcouponbond:40401040P=++=$931.01(1.07)(1.07)(1.066)(1.07)(1.066)(1.062)Theactualpriceofthebond($950)issignificantlygreaterthanthepricededucedusingthespotandforwardratesembeddedinthepricesoftheotherbonds($931.01).Hence,aprofitopportunityexists.Inordertotakeadvantageofthisopportunity,oneshouldsellthe4percentcouponbondshortandpurchasethe8percentcouponbond.khdaw.com5.a.LetBS,BMandBLbethepricesoftheshort-,medium-andlong-termbonds,respectively.Then,buyingtwomedium-termbondsandshort-sellingoneshort-termbondgivesthesamepayoffsasbuyingthelong-termbond.Therefore,BL=2BM–BS=(2×$83)–$98=$68b.Whetherratesriseorfall,theshort-termbondwillbeworth100.Thepriceofthemedium-termbondwilldecreaseto$76.5ifratesriseandwillincreaseto$93ifratesfall.Thepriceofthelong-termbondwilldecreaseto$53ifratesriseandwillincreaseto$86ifratesfall.c.Therisk-neutralexpectationis2%perquarter,or,moreprecisely:2/98=2.04%perquarter课后答案网d.Letpequaltheprobabilityofaratedecrease.Then,ifinvestorsarerisk-neutral:www.hackshp.cn83+(10×p)+(1–p)×(–6.5)=83×1.02Solving,wefindthat:p=0.4945and(1–p)=0.5055e.TheexpectedreturnfortheTreasurybillis2%.Theexpectedreturnforthemediumtermbondis:[0.4945×(10/83)]+[0.5055×(–6.5/83)]=0.02=2%Theexpectedreturnforthelong-termbondis:[0.4945×(18/68)]+[0.5055×(–15/68)]=0.02=2%205khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER24CreditRiskAnswerstoPracticeQuestions1.ThevalueofCompanyA’szero-couponbonddependsonlyontheten-yearspotrate.InordertovalueCompanyB’sten-yearcouponbond,eachcouponinterestpaymentmustbediscountedattheappropriatespotrate.Thisisnotcomplicatedifthetermstructureisflatsothatallspotratesarethesame.However,itcancausedifficultieswhenlong-termratesareverydifferentfromshort-termrates.khdaw.com2.IfCompanyXhassuccessfullymatchedthetermsofitsassetsandliabilities,thepaymentof$150maybereasonablyassuredwhilethe$50isconsiderablysmallerandnotdueuntilthedistantfuture.CompanyYhasarelativelylargeamountdueinanintermediatetimeframe.Thus,theriskexposureofCompanyYtofutureeventsmaybegreaterthanthatforCompanyX.3.Somecommonproblemsare:a.Dishonestresponses(usuallynotasignificantproblem).b.Thecompanyneverlearnswhatwouldhavehappenedtorejectedapplicants,norcanitrevisethecoefficientstoallowforchangingcustomer课后答案网behavior.c.Thecreditscoringsystemcanonlybeusedtoseparate(fairlyobvious)sheepfromgoats.d.Mechanicalapplicationmayleadtosocialandlegalproblems(e.g.,www.hackshp.cnred-lining)e.Thecoefficientestimationdataare,ofnecessity,fromasampleofactualloans;inotherwords,theestimationprocessignoresdatafromloanapplicationsthathavebeenrejected.Thiscanleadtobiasesinthecreditscoringsystem.f.Ifacompanyoverestimatestheaccuracyofthecreditscoringsystem,itwillrejecttoomanyapplicants.Itmightdobettertoignorecreditscoresaltogetherandoffercredittoeveryone.4.Internetexercise;answerswillvary.206khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.Market-basedriskmodelsusecomparisonsbetweenafirm’sdebtlevelandthemarketvalueofthefirm’sassetsinordertoassessthelikelihoodofdefaultonthefirm’sdebt.Theprobabilityofdefaultisafunctionoftherelationshipbetweentheamountofdebtandthevalueofthefirm’sassets.Suchmodelsrequireestimatesofgrowthinthevalueofthefirm’sassets,variabilityofassetvaluesandthefacevalueandmaturityofthefirm’sdebt.Thevalueandthevariabilityofthefirm’sassetsarebothdifficulttoestimate.Furthermore,afirmwithacomplexcapitalstructurethatincludesseveralclassesofdebtcannotbeequatedtoasinglevaluetocomparetothevalueofthefirm’sassets.6.Thevalueatriskiscomputedfromthedatainthefollowingtable:khdaw.comRatingBondPricePercentageafterOnePercentageYieldinOneChangeinYearYearPriceAAA0.00%4.43%N/AN/AAA0.08%4.56%151.76+51.70%A0.27%4.80%149.48+49.48%BBB0.34%5.40%143.99+43.99%BB5.39%9.45%113.25+13.25%B82.41%11.70%100.000.00%CCC4.92%15.15%83.63-16.37%Default6.59%N/AN/A-52.90%Theexpectedoutcomeis–3.25%,whichiscomputedasaweightedaverageof课后答案网thepercentageineachbondratingcategoryafteroneyear(column2)timestherespectivepercentagechangeinprice(column5).www.hackshp.cn207khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Wecanconsiderthevalueofequitytobethevalueofacallonthefirm’sassets,withanexercisepriceequaltothepaymentduetothebondholders.ForBackwoods,theexercisepriceis$1,090.Also:P=1200σ=0.45t=1.0rf=0.09d=log[P/PV(EX)]/σt+σt/211=log[1200/(1090/1.09)]/(0.45×1.0)+(0.45×1.0)/2=0.6302d=d−σt=0.6302−(0.45×1.0)=0.180221N(dkhdaw.com1)=N(0.6302)=0.7357N(d2)=N(0.1802)=0.5714Callvalue=[N(d1)×P]–[N(d2)×PV(EX)]=[0.7357×1200]–[0.5714×1000)]=$311.36Thus,thevalueofequityis$311.Withanassetmarketvalueof$1,200,themarketvalueofdebtis:$1,200–$311=$8892.For100%leverage,weusethefollowingassumptions:•V=marketvalueofassets=$100课后答案网•rf=0%sothatD=facevalueofdebt=facevaluediscountedattheriskfreeinterestrate=$100•ForBlack-Scholesmodel:stockprice=valueofassets=$100andexerciseprice=facevalueofdebt=$100www.hackshp.cn•Standarddeviationofassetvalue=40%Inthefollowingtable,wecomputebondvalueasfollows:presentvalueofpromisedpaymentstobondholders–valueofput208khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com TimetoValueofValueofBondmaturityputbondyieldofbond115.85284.1518.84%222.27077.7313.42%327.09772.9011.11%431.08468.929.75%534.52865.478.84%637.57962.428.17%740.33059.677.66%842.83957.167.24%945.14954.856.90%1047.29152.716.61%1149.28850.716.37%1251.15848.846.15%khdaw.com1352.91647.085.97%1454.57445.435.80%1556.14243.865.65%1657.62942.375.51%1759.04140.965.39%1860.38639.615.28%1961.66738.335.18%2062.89137.115.08%2164.06035.944.99%2265.18034.824.91%2366.25333.754.84%2467.28132.724.77%2568.26931.734.70%For60%leverage,weusethefollowingassumptions:课后答案网•V=marketvalueofassets=$100•rf=0%sothatD=facevalueofdebt=facevaluediscountedattheriskfreeinterestrate=$60•ForBlack-Scholesmodel:stockprice=valueofassets=$100www.hackshp.cnandexerciseprice=facevalueofdebt=$60•Standarddeviationofassetvalue=40%209khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Thefollowingtableshowsresultsfor60%leverage:TimetoValueofValueofBondmaturityputbondyieldofbond11.46158.542.50%24.27055.733.76%36.95253.054.19%49.39350.614.35%511.61648.384.40%613.65246.354.40%715.53144.474.37%817.27442.734.34%918.89941.104.29%1020.42239.584.25%1121.85338.154.20%khdaw.com1223.20236.804.16%1324.47835.524.11%1425.68734.314.07%1526.83533.174.03%1627.92732.073.99%1728.96931.033.95%1829.96330.043.92%1930.91229.093.88%2031.82128.183.85%2132.69227.313.82%2233.52726.473.79%2334.32825.673.76%2435.09824.903.73%2535.83824.163.71%课后答案网Graphsfor60%and100%leverageareshownonthenextpage.www.hackshp.cn210khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Leverage=60%5.00%4.50%4.00%3.50%3.00%2.50%2.00%Differenceinyieldkhdaw.com1.50%1.00%0.50%0.00%051015202530Maturity,yearsLeverage=100%20.00%课后答案网18.00%16.00%www.hackshp.cn14.00%12.00%10.00%8.00%Differenceinyield6.00%4.00%2.00%0.00%051015202530Maturity,years211khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER25TheManyDifferentKindsofDebtAnswerstoPracticeQuestions1.Ifthebondisissuedatfacevalueandinvestorsdemandayieldof8.25%,then,immediatelyaftertheissue,thepricewillbe$1,000.Astimepasses,thepricewillgraduallyrisetoreflectaccruedinterest.Forexample,justbeforethefirst(semi-annual)couponpayment,thepricewillbe$1,041.25,andthen,uponpaymentofthecoupon($41.25),thepricewilldropto$1,000.Thispatternwillberepeatedthroughoutthelifeofthebondaslongasinvestorscontinuetodemandareturnof8.25%.khdaw.com2.Answersherewillvary,dependingonthecompanychosen.Somekeyareasthatshouldbeexaminedare:couponrate,maturity,security,sinkingfundprovision,andcallprovision.3.Floating-ratebondsprovidebondholderswithprotectionagainstinflationandrisinginterestrates,butthisprotectionisnotcomplete.Inpractice,theextentoftheprotectiondependsonthefrequencyoftherateadjustmentsandthebenchmarkrate.(Notonlycantheyieldcurveshift,butyieldspreadscanshiftaswell.)课后答案网Similarly,puttablebondsprovidethebondholderswithprotectionagainstanincreaseindefaultrisk,butthisprotectionisnotabsolute.Ifthecompany’sproblemssuddenlybecomepublicknowledge,thevalueofthecompanymayfallsoquicklythatbondholdersmightstillsufferlosseseveniftheyputtheirbondswww.hackshp.cnimmediately.4.Firstmortgagebondholderswillreceivethe$200millionproceedsfromthesaleofthefixedassets.Theremaining$50millionofmortgagebondsthenrankalongsidetheunsecuredseniordebentures.Theremaining$100millioninassetswillbedividedbetweenthemortgagebondholdersandtheseniordebentureholders.Thus,themortgagebondholdersarepaidinfull,theseniordebentureholdersreceive$50millionandthesubordinateddebentureholdersreceivenothing.212khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.Iftheassetsaresoldanddistributedaccordingtostrictprecedence,thefollowingdistributionwillresult.InSubsidiaryA,the$320millionofdebentureswillbepaidoffand($500million–$320million)=$180millionwillberemittedtotheparent.InSubsidiaryB,the$180millionofseniordebentureswillbepaidoffand($220million–$180million)=$40millionofthe$60millionsubordinateddebentureswillbepaid.Intheholdingcompany,therealestatewillbesoldand($180million+$80million)=$260millionwillbepaidinpartialsatisfactionofthe$400millionseniorcollateraltrustbonds.6.a.Typically,avariable-ratemortgagehasalowerinterestratethanacomparablefixed-ratemortgage.Thus,youcanbuyabiggerhouseforkhdaw.comthesamemortgagepaymentifyouuseavariable-ratemortgage.Thesecondconsiderationisrisk.Withavariable-ratemortgage,theborrowerassumestheinterestraterisk(althoughinpracticethisismitigatedsomewhatbytheuseofcaps),whereas,withafixed-ratemortgage,thelendinginstitutionassumestherisk.b.Ifborrowershaveanoptiontoprepayonafixed-ratemortgage,theyarelikelytodosowheninterestratesarelow.Ofcourse,thisisnotthetimethatlenderswanttoberepaidbecausetheydonotwanttoreinvestatthelowerrates.Ontheotherhand,theoptiontoprepayhaslittlevalueifratesarefloating,sofloatingratemortgagesreducethereinvestmentriskforholdersofmortgagepass-throughcertificates.课后答案网7.Asharpincreaseininterestratesreducesthepriceofanoutstandingbondrelativetothepriceofanewlyissuedbond.Foragivencallprice,thisimpliesthatthevaluetothefirmofthecallprwww.hackshp.cnovisionisgreaterforthenewlyissuedbond.Otherthingsequal,theyieldofthemorerecentlyissuedbondsshouldbegreater,reflectingthehigherprobabilityofcall.Notice,however,thattheoutstandingbondwillprobablyhavealowercallpriceandperhapsashorterperiodofcallprotection;thesemaybeoffsettingfactors.8.Ifthecompanyactsrationally,itwillcallabondassoonasthebondpricereachesthecallprice.Forazero-couponbond,thiswillneverhappenbecausethepricewillalwaysbebelowthefacevalue.Forthecouponbond,thereissomeprobabilitythatthebondwillbecalled.Toputthissomewhatdifferently,thecompany’soptiontocallismeaninglessforthezero-couponbond,buthassomevalueforthecouponbond.Therefore,thepriceofthecouponbond(allelseequal)willbelessthanthepriceofthezero,and,hence,theyieldonthecouponbondwillbehigher.213khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 9.a.UsingFigure25.2inthetext,wecanseethat,ifinterestratesrise,thechangeinthepriceofthenoncallablebondwillbegreaterthanthechangeinpriceofthecallablebond.b.Onthatdate,itwillbeinoneparty’sinteresttoexerciseitsoption,andthebondswillberepaid.10.Seefigurebelow.Valueofputtablebondkhdaw.comPutttablebond100Straightbond0100Valueofstraightbond课后答案网11.AlphaCorp.’snettangibleassetlimitis200percentofseniordebt.Therefore,withnettangibleassetsof$250million,Alpha’stotaldebtcannotexceed$125million.Alphacanissueanadditional$25millioninseniordebt.www.hackshp.cn12.a.Therearetwoprimaryreasonsforlimitationsonthesaleofcompanyassets.First,couponandsinkingfundpaymentsprovidearegularcheckonthecompany’ssolvency.Ifthefirmdoesnothavethecash,thebondholderswouldliketheshareholderstoputupnewmoneyordefault.Butthischeckhaslittlevalueifthefirmcansellassetstopaythecouponorsinkingfundcontribution.Second,thesaleofassetsinordertoreinvestinmoreriskyventuresharmsthebondholders.b.Thepaymentofdividendstoshareholdersreducesassetsthatcanbeusedtopayoffdebt.Intheextremecase,adividendthatisequaltothevalueoftheassetsleavesbondholderswithnothing.c.Iftheexistingdebtisjunior,thentheoriginaldebtholderslosebyhavingthenewdebtrankaheadoftheirs.Iftheexistingdebtissenior,thentheissuanceofadditionalseniordebtmeansthatthesameamountofequitysupportsagreateramountofdebt;i.e.,thefirm’sleveragehasincreased,andthefirmfacesagreaterprobabilityofdefault.Thisharmstheoriginaldebtholders.214khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 13.Projectfinancemakessenseiftheprojectisphysicallyisolatedfromtheparent,offersthelendertangiblesecurityandinvolvesrisksthatarebettersharedbetweentheparentandothers.Thebestexampleisinthefinancingofmajorforeignprojects,wherepoliticalriskcanoftenbeminimizedbyinvolvinginternationallenders.14.a.Witha$1,000facevalueforthebonds,abondholdercanconvertonebondinto:$1,000/$25=40sharesTheconversionvalueis:40×$30=$1,200b.Aconvertiblesellsattheconversionvalueonlyiftheconvertibleiscertaintobeexercised.Youcanthinkofowningtheconvertibleasequivalenttokhdaw.comowningfortysharesplusanoptiontoputthesharesbacktothecompanyinexchangeforthevalueofthebond.Thepriceoftheconvertiblebondexceedstheconversionvaluebythevalueofthisput.Also,iftheinterestontheconvertibleexceedsthedividendsonfortysharesofcommonstock,theconvertible’svaluereflectsthisadditionalincome.c.Yes.WhenSurpluscalls,thepriceoftheconvertibleswillfalltotheconversionvalue.Thatis,bondholderswillbeforcedtoconvertinordertoescapethecall.Bynotcalling,Surplusishandingbondholdersa‘freegift’worth25percentofthebond’sfacevalue[i.e.,(130–105)/100],attheexpenseoftheshareholders.课后答案网15.a.Ifthefairrateofreturnona10-yearzero-couponnon-convertiblebondis8%,thenthepricewouldbe:10$1,000/1.08=$463.19www.hackshp.cnTheconversionvalueis:10×$50=$500Byconverting,youwouldgain:$500–$463.19=$36.81Thatis,youcouldconvert,sellthetensharesfor$500,andthenbuyacomparablestraightbondfor$463.19.Otherwise,ifyoudonotconvert,andthebondisnolongerconvertibleinthefuture,youwillownanon-convertiblePigletbondworth$463.19b.Investorsarepaying($550.00–$463.19)=$86.81fortheoptiontobuytenshares.9c.Inoneyear,bondvalue=$1,000/1.08=$500.25(i.e.,thevalueofacomparablenon-convertiblebond)Thenthevalueoftheconvertiblebondis:$500.25+$86.81=$587.06215khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 16.a.Assumeafacevalueof$1,000.Theconversionpriceis:$1,000/27=$37.04b.Theconversionvalueis:27×$47=$1,269c.Yes,youshouldconvertbecausethevalueoftheshares($1,269)isgreaterthanthematurityvalueofthebond.17.a.Theyieldtomaturityonthebondiscomputedasfollows:15$1,000=$532.15×(1+r)15khdaw.com1,000/532.15=1.8792=(1+r)(1/15)1.8792=1.0430=(1+r)r=0.0430=4.30%b.Thevalueofthenon-convertiblebondwouldbe:15$1,000/(1.10)=$239.39Theconversionoptionwasworth:$532.15–$239.39=$292.76c.Conversionvalueofthebondsattimeofissuewas:课后答案网8.76×$50=$442.38d.Theinitialconversionpricewas:$532.15/8.76=$60.75www.hackshp.cne.Callpricein2005is:6$603.71×1.0430=$777.20Therefore,theconversionpriceis:$777.20/8.76=$88.72Theincreaseintheconversionpricereflectstheaccretedvalueofthebondsinceithasazerocoupon.f.Ifinvestorsactrationally,theyshouldputthebondbacktoMarriottassoonasthemarketpricefallstotheputexerciseprice.g.Callpricein2005is:7$603.71×1.0430=$810.62Marriottshouldcallthebondsifthepriceisgreaterthan$810.62216khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Theexistingbondsprovide$30,000peryearfor10yearsandapaymentof$1,000,000inthetenthyear.Assumingthatallbondholdersareexemptfromincometaxes,themarketvalueofthebondsis:$30,000$30,000$30,000$1,000,000PV=++?++=$569,880210101.101.101.101.10Thus,thedebtcouldberepurchasedwithapaymentof$569,880today.Fromthestandpointofthecompany,thecashoutflowsassociatedwiththebondsare$1,000,000inthetenthyear,and$30,000peryear,lessannualtaxkhdaw.comsavingsof(0.35×$30,000)=$10,500.Therefore,thenetcashoutflowis($30,000–$10,500)=$19,500peryear.Tocalculatetheamountofnew10percentdebtsupportedbythesecashflows,discounttheafter-taxcashflowsattheafter-taxinterestrate(6.5percent):$19,500$19,500$19,500$1,000,000PV=++?++=$672,908210101.0651.0651.0651.065Inotherwords,thevalueofthesebondstothefirmis$672,908andthemarketvalueofthebondsis$569,880.Thefirmcouldrepurchasethebondsfor$569,880andthenissue$672,908ofnew10percentdebtthatwouldrequirecashoutflowswithapresentvalueequaltothatoftheoriginaldebt.Thefirmcouldalso,ofcourse,immediat课后答案网elypocketthedifference($103,028).Nowsupposethatbondholdersaresubjecttopersonalincometaxes.High-incomeinvestors(i.e.,thoseinhighincometaxbrackets)willfavorlow-couponbondsandwillbidupthepricesofthosebonds.Ifthelowcouponbondsareworthmoretothehigh-incomeinvestorthantheyaretoDorlcote,thenDorlcotewww.hackshp.cnshouldnotrepurchasethebonds.(Notethat,ifDorlcoteissuedthe3percentbondsatfacevalueandthenrepurchasesthebondsfor$569,880,thenthecompanywillbeliablefortaxesonthegain.)2.TheadvantagesofsettingupaseparatelyfinancedcompanyforHubcostemprimarilyfromtheattempttoaligntheinterestsofvariouspartieswiththesuccessfuloperationoftheplant.Forexample,theconstructionfirmwasalsoashareholderinordertoensurethattheplantwouldrunaccordingtospecifications.Bymakingitaseparateentity,Hubcocouldalsoenterintocontractionagreementswithouttheneedtogainapprovalfromaparentcompany.Similarly,ifHubcofailed,thennoassetsbeyondtheprojects’couldbeattached.IndependencealsoallowedHubcotodesigncontractswithsuppliers,customers,andfundingsourcestomeetspecificneedsand/orconcerns.217khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.a.Inthecaseofthesafeproject,thepayoffalwaysexceeds$7million,sothatthelenderwillalwaysreceivethepromisedpayment.Ms.Blavatskyhasa40%chanceofreceiving($12.5million-$7million)=$5.5millionanda60%chanceofreceiving($8million-$7million)=$1million.Thus,forthelender,theexpectedpayoffis:(0.4×$7million)+(0.4×$7million)=$7millionForMs.Blavatsky,theexpectedpayoffis:(0.4×$5.5million)+(0.6×$1million)=$2.8millionb.Inthecaseoftheriskyproject,thereisa40%chanceofa$20millionpayoff,inwhichcasethelenderwillreceive$7millionandMs.Blavatskykhdaw.com$13million.Thereisalsoa60%chanceofa$5millionpayoff,inwhichcasethelenderwillreceive$5millionandMs.Blavatskynothing.Forthelender,theexpectedpayoffis:(0.4×$7million)+(0.6×$5million)=$5.8millionForMs.Blavatsky,theexpectedpayoffis:(0.4×$13million)+(0.6×$0million)=$5.2millionThus,thelenderwillwantMs.BlavatskytochoosethesafeprojectwhileMs.Blavatskywillprefertheriskyproject.Supposenowthatthedebtisconvertibleinto50%ofthevalueofthefirm.Forthesafeproject,thereisa40%chancethelenderwillbefacedwitha课后答案网choiceof$7millionor50%ofthe$12.5million,whichis$6.25million;thelenderwillchoosetheformer.Thereisalsoa60%chancethelenderwillfaceachoiceof$7millionor50%of$8million,whichis$4million;thelenderwillchoose$7million.Thus,thewww.hackshp.cnexpectedpayofftothelenderfromthesafeprojectis:(0.4×$7million)+(0.6×$7million)=$7millionFortheriskyproject,thereisa40%chancethelenderwillbefacedwithachoiceof$7millionor50%of$20million,whichis$10million;thelenderwillchoosethelatter.Thereisalsoa60%chancethelenderwillfaceachoiceof$5millionor50%of$5million,whichis$2.5million;thelenderwillchoose$5million.Thus,theexpectedpayofftothelenderfromtheriskyprojectis:(0.4×$10million)+(0.6×$5million)=$7millionTherefore,thelenderreceivesthesameexpectedpayoff(i.e.,$7million)fromeachofthetwoprojects.218khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.Theexistingshareholderswillbeharmedbytheissueofconvertiblebonds.Theconversionprovisionwillbeworthmorethantheconvertibleholderspayforit.Thenewconvertibleholderswillgainlessthannewshareholderswouldgain,however.Thiscanbeseenbyconsideringtheconvertibleasthestockplusaputoption.Ingeneral,ifthestockistrulyunderpriced,theexistingshareholdersarebetteroffissuingthesafestpossibleasset;thispreventsthenewholdersoftheassetfromsharingtherewardsofanincreaseinstockvaluewhenanincreaseinnewinformationbecomesknown.Theoneexceptiontothisresultmayoccurwhencommonstockisundervaluedbecauseinvestorsoverestimatethefirm’srisk.Rememberthatoptionswrittenonriskyassetsaremorevaluablethanoptionswrittenonsafeones.Thus,inthiscase,investorsmayovervaluetheconversionoption,whichmaymakethekhdaw.comconvertibleissuemoreattractivethanastockissue.课后答案网www.hackshp.cn219khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER26LeasingAnswerstoPracticeQuestions1.a.Forcomparisonpurposes,thesolutiontoQuizQuestion5isshownbelow:t=0t=1t=2t=3t=4t=5t=6InitialCost-3000.00Depreciation600.00960.00576.00345.60345.60172.80Depreciationtaxshield210.00336.00201.60120.96120.9660.48After-taxadmin.costs-260.00-260.00-260.00-260.00-260.00-260.00Total-3260.00-50.0076.00-58.40-139.04-139.0460.48PV(at9%)=-$3,439.80khdaw.comBreak-evenrent1082.291082.291082.291082.291082.291082.29Tax-378.80-378.80-378.80-378.80-378.80-378.80Break-evenrentaftertax703.49703.49703.49703.49703.49703.49PV(at9%)=-$3,439.80CashFlow-2556.51653.49779.49645.09564.45564.4560.48Intheabovetable,wesolveforthebreak-evenleasepaymentsbyfirstsolvingfortheafter-taxpaymentthatprovidesapresentvalue,discountedat9%,equaltothepresentvalueofthecosts,keepinginmindthattheannuitybeginsimmediately.Thensolveforthebreak-evenrentasfollows:Break-evenrent=$703.49/(1–0.35)=$1,082.29Iftheexpectedrateofinflationis课后答案网5percentperyear,thenadministrativecostsincreaseby5percentperyear.Wefurtherassumethattheleasepaymentsgrowattherateofinflation(i.e.,thepaymentsareindexedtoinflation).However,thedepreciationtaxshieldamountsdonotchangebecausedepreciationisbawww.hackshp.cnsedontheinitialcostofthedesk.Theappropriatenominaldiscountrateisnow:(1.05×1.09)–1=0.1445=14.45%Thesechangesyieldthefollowing,indicatingthattheinitialleasepaymenthasincreasedfrom$1,082toabout$1,113:t=0t=1t=2t=3t=4t=5t=6InitialCost-3000.00Depreciation600.00960.00576.00345.60345.60172.80Depreciationtaxshield210.00336.00201.60120.96120.9660.48After-taxadmin.costs-260.00-273.00-286.65-300.98-316.03-331.83Total-3260.00-63.0049.35-99.38-195.07-210.8760.48PV(at14.45%)=-$3,537.83Break-evenrent1113.131168.791227.231288.591353.021420.67Tax-389.60-409.08-429.53-451.01-473.56-497.23Break-evenrentaftertax723.53759.71797.70837.58879.46923.43PV(at14.45%)=-$3,537.83CashFlow-2536.47696.71847.05738.20684.39712.5660.48220khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Here,wesolveforthebreak-evenleasepaymentsbyfirstsolvingfortheafter-taxpaymentthatprovidesapresentvalue,discountedat9%,equaltothepresentvalueofthecosts,keepinginmindthattheannuitybeginsimmediately.Weusethe9%discountrateinordertofindtherealvalueofthepayments(i.e.,$723.53).Theneachofthesubsequentpaymentsreflectsthe5%inflationrate.Solveforthebreak-evenrentasfollows:Break-evenrent=$723.53/(1–0.35)=$1,113.13b.Withareductioninrealleaseratesof10percenteachyear,thenominalleaseamountwilldecreaseby5.5percenteachyear.Thatis,thenominalleaserateismultipliedbyafactorof(1.05×0.9)=0.945eachyear.Thus,wehave:khdaw.comt=0t=1t=2t=3t=4t=5t=6InitialCost-3000.00Depreciation600.00960.00576.00345.60345.60172.80Depreciation.taxshield210.00336.00201.60120.96120.9660.48After-taxadmin.costs-260.00-273.00-286.65-300.98-316.03-331.83Total-3260.00-63.0049.35-99.38-195.07-210.8760.48PV(at14.45%)=-$3,537.83Break-evenrent1388.821312.441240.251172.041107.581046.66Tax-486.09-459.35-434.09-410.21-387.65-366.33Break-evenrentaftertax902.73853.08806.16761.83719.92680.33PV(at14.45%)=-$3,537.77CashFlow-2357.27790.08855.51662.44524.85469.4660.48Here,whenwesolveforthefirstafter-taxpayment,useadiscountrateof:课后答案网(1.09/0.9)–1=0.2111=21.11%2.Ifthecostofnewlimosdecreasesby5percentperyear,thentheleasewww.hackshp.cnpaymentsalsodecreaseby5percentperyear.IntermsofTable26.1,theonlychangeisinthebreak-evenrent.t=0t=1t=2t=3t=4t=5t=6Total-82.80-2.550.60-2.76-4.78-4.78-6.29Break-evenrent29.9728.4727.0425.6924.4123.1922.03Tax-10.49-9.96-9.47-8.99-8.54-8.12-7.71Break-evenrentaftertax19.4818.4117.3916.4415.5314.6813.87Cashflow-63.3215.9518.1813.9411.0810.298.03NPV(at7%)=0.00Here,whenwesolveforthefirstafter-taxpayment,useadiscountrateof:(1.07/0.95)–1=0.1263=12.63%221khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 3.a.t=0t=1t=2t=3t=4t=5t=6t=7Costofnewbus100.00Lostdepreciationtaxshield-4.00-6.40-3.84-2.30-2.30-1.150.00Leasepayment-16.90-16.90-16.90-16.90-16.90-16.90-16.90-16.90Taxshieldofleasepayment3.383.383.383.383.383.383.383.38Cashflowoflease86.48-17.52-19.92-17.36-15.82-15.82-14.67-13.52NPV(at6.5%)=-$4,510b.Assumethestraight-linedepreciationisfiguredonthesamebasisastheACRSdepreciation,namely5years,beginninghalfwaythroughthefirstyear.khdaw.comt=0t=1t=2t=3t=4t=5t=6t=7Costofnewbus100.00Lostdepreciationtaxshield-3.50-7.00-7.00-7.00-7.00-3.500.00Leasepayment-16.90-16.90-16.90-16.90-16.90-16.90-16.90-16.90Taxshieldofleasepayment5.925.925.925.925.925.925.925.92Cashflowoflease89.02-14.49-17.99-17.99-17.99-17.99-14.49-10.99NPV(at6.5%)=$5664.Thenetpresentvalueofthelessor’scashflowsconsistsofthecostofthebus($100),thepresentvalueofthedepreciationtaxshield($29.469)andthepresentvalueoftheafter-taxleasepayments:课后答案网⎛111⎞−100+29.469+(1−0.35)×P×⎜1+++?+⎟27⎝1.0651.0651.065⎠Tofindtheminimumrental,setNPV=0andsolveforP:www.hackshp.cn4.21494P=70.531P=16.73or$16,730GreymareshouldtaketheleaseaslongastheNPVoftheleaseisgreaterthanorequaltozero.Thenetpresentvalueofthecashflowsisthecostofthebussaved($100)lessthepresentvalueoftheleasepayments:⎛111⎞100−P×⎜1+++?+⎟27⎝1.101.101.10⎠(Notethat,becauseGreymarepaysnotaxes,theappropriatediscountrateis10percent.)SettingthisexpressionequaltozeroandsolvingforP,wefind:P=17.04or$17,040ThisisthemaximumamountthatGreymarecouldpay.Thus,theleasepaymentwillbebetween$16,730and$17,040.222khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.Theoriginalcashflowsareasgiveninthetext.Ingeneral,thenetpresentvalueofthelessor’scashflowsconsistsofthecostofthebus,thepresentvalueofthedepreciationtaxshield,andthepresentvalueoftheafter-taxleasepayments.TofindtheminimumrentalP,wesetthenetpresentvaluetozeroandsolveforP.WecanthenusethisvalueforPtocalculatethevalueoftheleasetothelessee.a.Alessortaxrateof50%.Cashflowsforthelessorare:⎛0.20000.32000.19200.11520.11520.0576⎞−100+(0.50×100)×⎜+++++⎟23456⎝1.051.051.051.051.051.05⎠⎛111⎞+(1−0.50)×P×⎜1+++?+⎟=−100+43.730+P(3.3932)=027khdaw.com⎝1.051.051.05⎠P=16.58or$16,580ForGreymare,thenetpresentvalueofthecashflowsisthecostofthebussaved(100)lessthepresentvalueoftheleasepayments:⎛111⎞100−P×⎜1+++?+⎟=100−(16.58×5.8684)=2.70or$2,70027⎝1.101.101.10⎠b.Immediate100%depreciation.Cashflowsforthelessorare:⎛111⎞−100+(0.35×100)+(1−0.35)×P×⎜1+++?+⎟=27课后答案网⎝1.0651.0651.065⎠−100+35+(P×4.2149)=0P=15.42or$15,420ForGreymare,thenetpresentvalueofthecashflowsis:www.hackshp.cn⎛111⎞100−P×⎜1+++?+⎟=100−(15.42×5.8684)=9.51or$9,510⎝1.101.1021.107⎠c.3-yearleasewith4annualrentals.Cashflowsforthelessorare:⎛0.20000.32000.19200.11520.11520.0576⎞−100+(0.35×100)×⎜+++++⎟23456⎝1.0651.0651.0651.0651.0651.065⎠⎛111⎞+(1−0.35)×P×⎜1+++⎟=−100+29.469+P(2.3715)=023⎝1.0651.0651.065⎠P=29.74or$29,740ForGreymare,thenetpresentvalueofthecashflowsis:⎛111⎞100−P×⎜1+++⎟=100−(29.74×3.4869)=−3.70or-$3,70023⎝1.101.101.10⎠223khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com d.Aninterestrateof20%.Cashflowsforthelessorare:⎛0.20000.32000.19200.11520.11520.0576⎞−100+(0.35×100)×⎜+++++⎟23456⎝1.131.131.131.131.131.13⎠⎛111⎞+(1−0.35)×P×⎜1+++?+⎟=−100+25.253+P(3.5247)=027⎝1.131.131.13⎠P=21.21or$21,210ForGreymare,thenetpresentvalueofthecashflowsis:⎛111⎞100−P×⎜1+++?+⎟=100−(21.21×4.6046)=2.34or$2,34027⎝1.201.201.10⎠khdaw.com6.IfGreymarepaysnotaxes,itsleasecashflowsconsistofaninflowof$100att=0andyearlyoutflowsof$16.9att=0throught=7.Iftheinterestrateiszero,theNPVoftheleaseisthesumofthesecashflows,or–$35.2(–$35,200).7.Undertheconditionsoutlinedinthetext,thevaluetothelessoris$700andthevaluetothelesseeis$820.Thekeytostructuringtheleaseistorealizethatthelesseeandthelessorarediscountingatdifferentinterestrates:10%forthelesseeand6.5%forthelessor.Thus,ifwedecreasetheearlyleasepaymentsandincreasethelaterleasepaymentsin课后答案网suchawayastoleavethelessor’sNPVunchanged,thelessee,byvirtueofthehigherdiscountrate,willbebetteroff.Onesuchsetofleasepaymentsisshowninthefollowingtable:t=0t=1t=2t=3t=4t=5t=6t=7Costofnewbus-100.00www.hackshp.cnDepreciationtaxshield7.0011.206.724.034.032.020.00Leasepayment13.0014.0017.0017.0017.0020.0020.0020.00Taxonleasepayment-4.55-4.90-5.95-5.95-5.95-7.00-7.00-7.00Cashflowoflease-91.5516.1022.2517.7715.0817.0315.0213.00LessorNPV(at6.5%)=0.707($707)LesseeNPV(at10%)=1.868($1,868)Thevaluetothelessoris$707andthevaluetothelessee(stillassumingitpaysnotax)is$1,868.8.a.BecauseNodheadpaysnotaxes:562NPV=+250−∑t=−59.5or−$59,500t=01.08224khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.ThecashflowstoCompuleaseareasfollows(assume5-yearACRSbeginningatt=0):t=0t=1t=2t=3t=4t=5t=6Costofcomputer-250.00Depreciation50.0080.0048.0028.8028.8014.40Depreciationtaxshield17.5028.0016.8010.0810.085.04Leasepayment62.0062.0062.0062.0062.0062.00Taxonleasepayment-21.70-21.70-21.70-21.70-21.70-21.70NetCashFlow-209.7057.8068.3057.1050.3850.385.04Theafter-taxinterestrateis:(1–0.35)×0.08=0.052=5.2%TheNPVofthecashflowsforCompuleaseis:40.0or$40,000.khdaw.comc.Theoverallgainfromleasingis:$40,000–$59,600=–$19,6009.a.TheSafetyRazorCompanyshouldtaketheleaseaslongastheNPVofthefinancingisgreaterthanorequaltozero.IfPistheannualleasepayment,thenthenetpresentvalueoftheleasetothecompanyis:⎛11⎞NPV=100−P×⎜1++?+⎟7⎝1.101.10⎠SettingNPVequaltozeroandsolvingforP,wefindthecompany’smaximumleasepaymentis17.04or$17,040.课后答案网TheNPVtothelessorhasthreecomponents:•Costofmachinery=–100•PVofafter-taxleasepayments,discountedattheafter-taxinterestratewww.hackshp.cnof:[(1–0.35)×0.10]=.065=6.5%:⎛11⎞P×(1−0.35)×⎜1++?+⎟=P×4.21497⎝1.0651.065⎠•PVofthedepreciationtaxshield,discountedattheafter-taxrateof6.50%(weassumedepreciationexpensebeginsatt=1):⎛.1429.2449.1749.1249.0893.0893.0893.0445⎞(0.35×100)⎜+++++++⎟=28.0952345678⎝1.0651.0651.0651.0651.0651.0651.0651.065⎠Tofindtheminimumrentalthelessorwouldaccept,wesumthesethreecomponents,setthistotalNPVequaltozero,thensolveforP:–100+(P×4.2149)+28.095=0Thus,Pisequalto17.06or$17,060,whichistheminimumleasepaymentthelessorwillaccept.225khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Ifthelessorisobligedtousestraight-linedepreciation,thishasnoeffectonthecompany’smaximumleasepayment.Thelessor’sPVofthedepreciationtaxshieldbecomes:⎛11⎞PV=(0.35)×(100/8)×⎜+?+⎟=26.6388⎝1.0651.065⎠Thus,thelessor’sminimumacceptableleasepaymentbecomes$17,410.10.TheproblemsresultingfromtheuseofIRRforanalyzingfinancialleasesarethesameproblemsdiscussedinChapter5.However,fouroftheseproblemsareparticularlytroublesomehere:khdaw.coma.Multiplerootsoccurrarelyincapitalbudgetingbecausetheexpectedcashflowsgenerallychangesignsonlyonce.Forfinancialleases,however,thisisoftennotthecase.Alesseehasanimmediatecashinflow,aseriesofoutflowsforanumberofyears,andthenaninflowinthelastyear.Withtwochangesofsign,theremaybe,andinpracticefrequentlyare,twodifferentvaluesfortheIRR.b.Anotherproblemarisesfromthefactthatriskisnotconstant.Forthelessee,theleasepaymentsarefairlyrisklessandtheinterestrateshouldreflectthis.However,thesalvagevalueoftheassetisprobablymuchriskier.Thisrequirestwodifferentdiscountrates.EachcashflowisnotimplicitlydiscountedtoreflectitsriskwhentheIRRisused.c.Ifthelessorandlesseedonotpaytaxesorifbothpayatthesamerate,课后答案网thentheIRRshouldbecalculatedfortheleasecashflowsandthencomparedtotheafter-taxrateofinterest.However,ifthecompanyistemporarilyinanon-taxpayingposition,thecostofcapitalchangesovertime.Thereisnosimplestandardofcomparison.www.hackshp.cnd.TheIRRmethodcannotbeusedtochoosebetweenalternativeleasebidswithdifferentlivesorpaymentpatterns.226khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Considerfirstthechoicebetweenbuyingandafive-yearfinanciallease.Ignoringsalvagevalue,theincrementalcashflowsfromleasingareshowninthefollowingtable:t=0t=1t=2t=3t=4t=5Buy:0.80probabilitythatcontractwillberenewedfor5yearsInitialcostofplane500.00Depreciationtaxshield-35.00-35.00-35.00-35.00-35.00Leasepayment-75.00-75.00-75.00-75.00-75.00Leasepaymenttaxshield26.2526.2526.2526.2526.25Totalcashflow451.25-83.75-83.75-83.75-83.75-35.00khdaw.comBuy:0.20probabilitythatcontractwillnotberenewedInitialcostofplane500.00Depreciationtaxshield-35.00Leasepayment-75.00Leasepaymenttaxshield26.25Totalcashflow451.25-35.00Expectedcashflow451.25-74.00-67.00-67.00-67.00-28.00PV(at5.85%)451.25-69.91-59.80-56.49-53.37-21.07TotalPV(at5.85%)=$190.60Wehavediscountedthesecashflowsatthefirm’safter-taxborrowingrate:0.65×0.09=0.0585=5.85%Thetableaboveshowsanapparentnetadvantagetoleasingof$190.61.课后答案网However,ifMagnabuystheplane,itreceivesthesalvagevalue.Thereisan80%probabilitythattheplanewillbekeptforfiveyearsandthensoldfor$300(lesstaxes)andthereisa20%probabilitythattheplanewillbesoldfor$400inoneyear.Discountingtheexpectedcashflowsatthecompanycostofcapitalwww.hackshp.cn(theseareriskyflows)gives:⎛300×(1-0.35)⎞⎛400⎞0.80×⎜⎟+0.20×⎜⎟=$151.2051⎝1.14⎠⎝1.14⎠Thenetgaintoafinancialleaseis:$190.60–$151.20=$39.40(Notethattheabovecalculationsassumethat,ifthecontractisnotrenewed,Magnacan,withcertainty,chargethesamerentontheplanethatitispaying,andtherebyzero-outallsubsequentleasepayments.Thisisanoptimisticassumption.)Theafter-taxcostoftheoperatingleaseforthefirstyearis:0.65×$118=$76.70227khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Assumethatafive-yearoldplaneisasproductiveasanewplane,andthatplanepricesincreaseattheinflationrate(i.e.,4%peryear).Thentheexpectedpaymentonanoperatingleasewillalsoincreaseby4%peryear.Sincethereisan80%probabilitythattheplanewillbeleasedforfiveyears,anda20%probabilitythatitwillbeleasedforonlyoneyear,theexpectedcashflowsfortheoperatingleaseareasshowninthetablebelow:t=0t=1t=2t=3t=4t=5Lease:0.80probabilitythatcontractwillberenewedfor5yearsAfter-taxleasepayment-76.70-79.77-82.96-86.28-89.730.00Lease:0.20probabilitythatcontractwillnotberenewedAfter-taxleasepayment-76.70khdaw.comExpectedcashflow-76.70-63.82-66.37-69.02-71.780.00PV(at14%)-76.70-55.97-51.07-46.59-42.500.00TotalPV(at14%)=$-272.84Thesecashflowsareriskyanddependonthedemandforlightaircraft.Therefore,wediscountthesecashflowsatthecompanycostofcapital(i.e.,14%).Thepresentvalueofthesepaymentsisgreaterthanthepresentvalueofthesafeleasepaymentsfromthefinanciallease,soitappearsthatthefinancialleaseisthelowercostalternative.Notice,however,ourassumptionaboutfutureoperatingleasecosts.Ifoldplanesarelessproductivethannewones,thelessorwouldnotbeabletoincreaseleasechargesby4%peryear.2.Thenetpaymentsforthecancelableleaseare:课后答案网0.65×(–$125)=–$81.25Ignoringthecancellationoption,thefirstpaymentis-$81.25,andtheexpectedvalueforthesubsequentpaymentsis:www.hackshp.cn0.80×(–$81.25)=–$65Thepresentvalueofthesepayments,discountedattheafter-taxborrowingrate(5.85%)is–$307.26,comparedto–$184.36forthefinanciallease.Therefore,Magnawouldbepaying$122.90forthecancellationoption.Supposethat,forexample,Magnawereabletocancelitsleaseafteroneyearandtakeoutafour-yearfinancialleasewithrentalpaymentsof$57peryear.Thepresentvalueofthecashflowswouldthenbethesameasforthefinanciallease.Therefore,itwouldrequirea24%reductionintheleasepayments,from$75to$57,tomakethecancellationoptionworthwhile.228khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER27ManagingRiskAnswerstoPracticeQuestions1.Insurancecompanieshavetheexperiencetoassessroutinerisksandtoadvisecompaniesonhowtoreducethefrequencyoflosses.Insurancecompanyexperienceandtheverycompetitivenatureoftheinsuranceindustryresultincorrectpricingofroutinerisks.However,BP,forexample,hasconcludedthatinsuranceindustrypricingofcoverageforlargepotentiallossesisnotefficientbecauseoftheindustry’slackofexperiencewithsuchlosses.Consequently,BPhaschosentoselfinsureagainsttheselargepotentiallosses.Effectively,thiskhdaw.commeansthatBPusesthestockmarket,ratherthaninsurancecompanies,asitsvehicleforinsuringagainstlargelosses.Inotherwords,largelossesresultinreductionsinthevalueofBP’sstock.Thestockmarketcanbeanefficientrisk-absorberfortheselargebutdiversifiablerisks.Insurancecompanyexpertisecanbebeneficialtolargebusinessesbecausetheinsurancecompany’sexperienceallowstheinsurancecompanytocorrectlypriceinsurancecoverageforroutinerisksandtoprovideadviceonhowtominimizetheriskofloss.Inaddition,theinsurancecompanyisabletopoolrisksandtherebyminimizethecostofinsurance.Rarelydoesitpayforacompanytoinsureagainstallrisks,however.Typically,largecompaniesself-insureagainstsmallpotentiallosses.课后答案网2.Ifpaymentsarereducedwhenclaimsagainstoneissuerexceedaspecifiedamount,theissuerisco-insuredabovesomelevel,andsomedegreeofon-goingviabilityisensuredintheeventofawww.hackshp.cncatastrophe.Thedisadvantageisthat,knowingthis,theinsurancecompanymayover-commitinthisareainordertogainadditionalpremiums.Ifthepaymentsarereducedbasedonclaimsagainsttheentireindustry,anon-goingandviableinsurancemarketmaybeassuredbutsomefirmsmayunder-commitandyetstillenjoythebenefitsoflowerpayments.Basisriskwillbehighestinthefirstcaseduetothelargerfirmspecificrisk.3.Thelistofcommodityfuturescontractsislong,andincludes:°GoldBuyersincludejewelers.Sellersincludegold-miningcompanies.°SugarBuyersincludebakers.Sellersincludesugar-canefarmers.°AluminumBuyersincludeaircraftmanufacturers.Sellersincludebauxiteminers.229khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.a.Ifthespotpricefallsto$525perounceinthreemonths’time,PhoenixMotorshasalossonthefuturescontractequalto:10,000×($550−$525)=$250,000PhoenixMotorshaslockedinthecostofpurchasing10,000ouncesofplatinumat$550perounce,or:10,000×$550=$5,500,000.Phoenixcannowbuy10,000ouncesinthespotmarketfor$525perounce:10,000×$525=$5,250,000.Thecostinthespotmarketplusthelossinthefuturesmarketsgivesatotalcostof$5,500,000.b.Ifthespotpriceincreasesto$625,thenPhoenixhasagaininthefuturesmarketthatoffsetstheincreasedcostinthespotmarket.Thegaininthekhdaw.comfuturesmarketis:10,000×($625−$550)=$750,000Thecostinthespotmarketis:10,000×$625=$6,250,000Thetotalcostisstill$5,500,000.t1/45.Ft=S0(1+rf−y)=21,317(1+0.16−0.04)=21,929.59Thefuturesarenotfairlypriced.6.(Notethattheyieldsgivenintheproblemstatementareannualized.)Ifwepurchasea9-monthTreasurybillfuture课后答案网scontracttoday,weareagreeingtospendacertainamountofmoneyninemonthsfromnowfora3-monthTreasurybill.So,thevaluationofthisfuturescontractinvolvesthreesteps:°First,findtheexpectedyieldofa3-monthTreasurybill9monthsfromnow(ywww.hackshp.cnf).°Second,findthecorrespondingpriceofthe3-monthTreasurybill9monthsfromnow(Pf).(Note:PfistheanswertothisPracticeQuestion,sostep3isnotarequiredstepforthissolution.)°Third,findthecorrespondingspotpricetoday.Theyieldofa3-monthTreasurybillninemonthsfromtodayisfoundasfollows(whererdenotesaspotrateandthesubscriptsrefertothetimetomaturity,inmonths):3/41/41(1+r9)×(1+yf)=(1+r12)3/41/41(1+0.07)×(1+yf)=(1+0.08)Solving,wefindthat:yf=0.1106=11.06%(annualizedrate)230khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Itfollowsthattheprice(perdollar)ofa3-monthTreasurybillninemonthsfromnowwillbe:$1P==$0.9741f1/4(1.1106)Thecorrespondingspotpricetodayis:$0.9741P==$0.92593/4(1.07)7.Tocheckwhetherfuturesarecorrectlypriced,weusethefollowingbasicrelationshipsforcommoditiesandforfinancialfutures,respectively:tkhdaw.comFt=S0(1+rf+storagecosts−convenienceyield)tFt=S0(1+rf−y)Thisgivesthefollowing:ActualFuturesValueofPriceFuturea.Magnoosium$2728.50$2728.50b.Quiche0.5140.585c.NevadaHydro78.3978.39d.Pulgas6,900.007,126.18e.Establishment97.5497.54Industriesstock课后答案网f.Wine14,200.0013,125.00**Assumessurplusstoragecannotberentedout.Otherwise,futuresareoverpricedaslongastheopportunitycostofstorageislessthan:$14,200–$13,125=$1,075www.hackshp.cnForEstablishmentIndustriesstock,computethetotalfuturevalueofthetwodividendpayments,asofsixmonthsfromnow,andthencomputeyintheaboveformulabydividingthistotalfuturevaluebythecurrentstockprice.Notethatforthecurrencyfuturesinpart(d),thefuturesandspotcurrencyquotesareindirectquotes(i.e.,pulgasperdollar)ratherthandirectquotes(i.e.,dollarsperpulga).IfIbuypulgastoday,Ipay($1/9300)perpulgainthespotmarketand0.5earninterestof[(1.95)–1]=0.3964=39.64%forsixmonths.IfIbuypulgasinthefuturesmarket,Ipay($1/6900)perpulgaandIearn7%interestonmydollars.Thus,thefuturespriceofonepulgashouldbe:1.3964/(9300×1.07)=0.00014033=1/7126.18Therefore,afuturesbuyershoulddemand7126.18pulgasfor$1.Wherethefuturesareoverpriced[i.e.,(f)above],itpaystoborrow,buythegoodsonthespotmarket,andsellthefuture.Wheretheyareunderpriced[i.e.,(b)and(d)],itpaystobuythefuture,sellthecommodityonthespotmarket,andinvestthereceiptsinasix-monthaccount.231khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.Wemakeuseofthebasicrelationshipbetweenthevalueoffuturesandthespotprice:tFt=S0(1+rf)Thisgivesthefollowingvalues:ContractLength(Months)1391521t(1+rf)1.004371.016631.057991.102881.15058rf5.37%6.82%7.81%8.15%8.34%9.a.TheNPVofaswapatinitiationiszero,assumingtheswapisfairlypriced.khdaw.comb.Ifthelong-termraterises,thevalueofafive-yearnotewithacouponrateof4.5%woulddeclineto957.30:454545451045++++=957.3012345(1.055)(1.055)(1.055)(1.055)(1.055)Withhindsight,itisclearthatAwouldhavebeenbetteroffkeepingthefixed-ratedebt.Alosesasaresultoftheincreaseinratesandthedealergains.c.Anowhasaliabilityequalto:1,000–957.30=42.70Thedealerhasacorrespondingasset.课后答案网110.a.Duration={[PV(C)]×1]+[PV(C)]×2]+[PV(C)]×3]}123VForSecurityA:www.hackshp.cn404040V=++=103.08A123(1.08)(1.08)(1.08)1⎧⎡40⎤⎡40⎤⎡40⎤⎫DurationA=⎨⎢1×1⎥+⎢2×2⎥+⎢3×3⎥⎬=1.95years103.08⎩⎣(1.08)⎦⎣(1.08)⎦⎣(1.08)⎦⎭ForSecurityB:120V==111.11B1(1.08)1⎡120⎤DurationB=⎢1×1⎥=1.00years111.11⎣(1.08)⎦232khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ForSecurityC:1010110V=++=105.15C123(1.08)(1.08)(1.08)1⎧⎡10⎤⎡10⎤⎡110⎤⎫DurationC=⎨⎢1×1⎥+⎢2×2⎥+⎢3×3⎥⎬=2.74years103.08⎩⎣(1.08)⎦⎣(1.08)⎦⎣(1.08)⎦⎭b.DurationA=[(X)(DurationB)]+[(1–X)(DurationC)]1.95=1.0X+[(1–X)(2.74)]⇒X=0.454and(1–X)=0.546Therefore,thefollowingpositionwouldimmunizetheinvestment:khdaw.comashortpositionof$4,540,000inSecurityBandashortpositionof$5,460,000inSecurityC.c.DurationB=[(X)(DurationA)]+[(1–X)(DurationC)]1.0=1.95X+[(1–X)(2.74)]⇒X=2.203and(1–X)=–1.203Therefore,thefollowingpositionwouldimmunizetheinvestment:ashortpositionof$22,030,000inSecurityAandalongpositionof$12,030,000inSecurityC.11.SupposeyouownanassetAandwishtohedgeagainstchangesinthevalueofthisassetbysellinganotherassetB.Inordertominimizeyourrisk,youshould课后答案网selldeltaunitsofB;deltameasuresthesensitivityofA’svaluetochangesinthevalueofB.Inpractice,deltacanbemeasuredbyusingregressionanalysis,wherethevalueofAisthedependentvariableandthevalueofBistheindependentvariable.www.hackshp.cnDeltaistheregressioncoefficientofB.Sometimesconsiderablejudgementmustbeused.Forexample,itmaybethatthehedgeyouwishtoestablishhasnohistoricaldatathatcanbeusedinaregressionanalysis.12.(a)(b)(c)GoldPriceUnhedgedFutures-HedgedOptions-HedgedPerOunceRevenueRevenueRevenue$280$280,000$301,000$298,000$300$300,000$301,000$298,000$320$320,000$301,000$318,000233khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 13.Standard&Poor’sindexfuturesarecontractstobuyorsellamythicalshare,whichisworth$500timesthevalueoftheindex.Forexample,iftheindexiscurrentlyat400,each‘share’isworth:$500×400=$200,000Legs’portfolioisequivalenttofivesuch‘shares.’IfLegssellsfiveindexfuturescontracts,then,insixmonths,hewillreceive:5×$500×priceoffuturesIftherelationshipbetweenthefuturespriceandthespotpriceisused,thisisequivalenttoreceiving:1/21/25×500×(spotpriceofindex)×(1+rf)=$1,000,000×(1+rf)Thisisexactlywhathewouldreceiveinsixmonthsifhesoldhisportfolionowandkhdaw.computthemoneyinasix-monthdeposit.Ofcourse,whenhesellsthefutures,Legsalsoagreestohandoverthevalueofaportfoliooffiveindex‘shares.’So,attheendofsixmonths,hecansellhisportfolioandusetheproceedstosettlehisfuturesobligation.Thus,byhedginghisportfolio,Legscan‘cashin’withoutsellinghisportfoliotoday.14.Wefindtheappropriatedeltabyusingregressionanalysis,withthechangeinthevalueofSwissRollasthedependentvariableandthechangeinthevalueofFrankfurterSausageastheindependentvariable.Theresultisthattheregressioncoefficient,whichisthedelta,is0.5.Inotherwords,theshortpositioninFrankfurterSausageshouldbehalfaslargeasthatinSwissRoll,or$50million.课后答案网15.a.0.75×$100,000=$75,000b.δ=0.75www.hackshp.cnc.Youcouldsell(1.2×$100,000)=$120,000ofgold(orgoldfutures)to2hedgeyourposition.However,sincetheRisless(0.5versus0.6forStockB),youwouldbelesswellhedged.234khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 16.a.Forthelease:ProportionProportionofPV(Ct)YearCtofTotalTotalValueat12%ValueTimesYear121.78570.17970.1797221.59440.16050.3210321.42360.14330.4299421.27100.12790.5117521.13490.11420.5711621.01330.10200.6119720.90470.09110.6374820.80780.08130.6504khdaw.comV=9.9353Duration=3.9131Forthe6-yeardebt(value$8.03million):ProportionProportionofPV(Ct)YearCtofTotalTotalValueat12%ValueTimesYear1120107.140.10710.1071212095.660.09570.1913312085.410.08540.2562412076.260.07630.3050512068.090.06810.340561120567.430.56743.4046V=1000.00课后答案网Duration=4.6048Thedurationoftheone-yeardebt(value$1.91million)isoneyear.Therefore,theaveragedurationofthedebtportfoliois:⎛www.hackshp.cn1.91⎞⎛8.03⎞⎜×1⎟+⎜×4.6048⎟=3.9121years⎜⎟⎜⎟⎝1.91+8.03⎠⎝1.91+8.03⎠Thisisequaltothedurationofthelease(withinaroundingerror).235khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Seethetablebelow.Pottertonisnolongerfullyhedged.Thevalueoftheliabilities($14.022million)isnowlessthanthevalueoftheasset($14.039million).Aonepercentchangeininterestratesaffectsthevalueoftheassetmorethanthevalueoftheliabilities.Tomaintainthehedge,thefinancialmanagerwouldadjustthedebtpackagetohavethesamedurationasthelease.Note,however,thatthemismatchisnegligibleandshouldnotgivethemanagersleeplessnights.Lease6-YearDebt1-YearDebtDebtPackageYieldValueChangePriceValuePriceValueValueChangeab2.5%14.340+2.144%152.3312.232109.272.08714.319+2.118%3.0%14.039148.7511.945108.742.07714.0223.5%13.748khdaw.com-2.073%145.2911.667108.212.06713.734-2.054%(a)$8.03millionfacevalue(b)$1.91millionfacevalue17.Assumethecurrentpriceofoilis$24perbarrel,thefuturespriceis$26,andtheoptionexercisepriceis$26.OilPriceFutures-HedgedOptions-HedgedPerBarrelExpenseExpense$24$26$24$26$26$26$28$26课后答案网$26Theadvantagesofusingfuturesarethatriskiseliminatedandthatthehedge,onceinplace,canbesafelyignored.Thedisadvantage,comparedtohedgingwithoptions,isthatoptionsallowforthepossibilityofagain.Hedgingwithoptionshasacost(i.e.,thecostoftheoption).www.hackshp.cn18.a.Tocalculatethesix-monthfuturesprice,weusethefollowingbasicrelationshipsforcommoditiesandforfinancialfutures,respectively:tFt=S0(1+rf+storagecosts−convenienceyield)tFt=S0(1+rf−y)Thus,thesix-monthfuturespricesare:Magnoosium:2,800×(1.03–0.04)=$2,772pertonOatBran:0.44×(1.03–0.03)=$0.44perbushelBiotech:140.2×1.03=$144.41AllenWrench:58.00×[1.03–(1.20/58.00)]=$58.545-YearT-Note:108.93×[1.03–(4.00/108.93)]=$108.20Ruple:*3.017ruples/$236khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com *Notethat,forthecurrencyfutures(i.e.,theWestonianruple),thespotcurrencyquoteisanindirectquote(i.e.,ruplesperdollar)ratherthanadirectquote(i.e.,dollarsperruple).IfIbuyruplestodayinthespotmarket,Ipay($1/3.1)perruple0.5inthespotmarketandearninterestof[(1.12)–1]=0.0583=5.83%forsixmonths.IfIbuyruplesinthefuturesmarket,Ipay($1/X)perruple(whereXistheindirectfuturesquote)andIearn6%interestonmydollars.Thus,thefuturespriceofonerupleshouldbe:1.0583/(3.1×1.03)=0.33144=1/3.017Therefore,afuturesbuyershoulddemand3.017ruplesfor$1.b.Themagnoosiumproducerwouldsell1,000tonsofsix-monthmagnoosiumfutures.khdaw.comc.Becausemagnoosiumpriceshavefallen,themagnoosiumproducerwillreceivepaymentfromtheexchange.Itisnotnecessaryfortheproducertoundertakeadditionalfuturesmarkettradestorestoreitshedgeposition.d.No,thefuturespricedependsonthespotprice,therisk-freerateofinterest,andtheconvenienceyield.e.Thefuturespricewillfallto$48.24(samecalculationasabove,withaspotpriceof$48):48.00×[1.03–(1.20/48.00)]=$48.24课后答案网f.First,werecalculatethecurrentspotpriceofthe5-yearTreasurynote.Thespotpricegiven($108.93)isbasedonsemi-annualinterestpaymentsof$40each(annualcouponrateis8%)andaflattermstructureof6%peryear.Assumingthat6%isthecompoundedrate,thesix-monthrateis:www.hackshp.cn1/2(1+0.06)–1=0.02956=2.956%Incorporatingsimilarassumptionswiththenewtermstructurespecifiedintheproblem,thenewspotpriceofthe5-yearTreasurynotewillbe$118.16.Thus,thefuturespriceofthe5-yearT-notewillbe:118.16×[1.02–(4.00/118.16)]=$116.52Thedealerwhoshorted100notesatthe(previous)futurespricehaslostmoney.g.Theimportercouldbuyathree-monthoptiontoexchangedollarsforruples,ortheimportercouldbuyafuturescontract,agreeingtoexchangedollarsforruplesinthreemonths’time.237khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 19.ThinkofLegsDiamond’sproblem(seePracticeQuestion13).Iffuturesareunderpriced,hewillstillbehedgedbysellingfuturesandborrowing,buthewillmakeaknownloss(theamountoftheunderpricing).If,forexample,hehedgesbysellingseven-monthfutures,henotonlyneedstoknowthattheyarefairlypricednowbutalsothattheywillbefairlypricedwhenhebuysthembackinsixmonths.Ifthereisuncertaintyaboutthefairnessoftherepurchaseprice,hewillnotbefullyhedged.Speculatorslikemis-pricedfutures.Forexample,ifsix-monthfuturesareoverpriced,speculatorscanmakearbitrageprofitsbysellingfutures,borrowingandbuyingthespotasset.Thisarbitrageisknownas‘cash-and-carry.’khdaw.com课后答案网www.hackshp.cn238khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Phillipsisnotnecessarilystupid.Thecompanysimplywantstoeliminateinterestraterisk.b.Theinitialtermsoftheswap(ignoringtransactionscostsandthedealer’sprofit)willbesuchthatthenetpresentvalueofthetransactioniszero.Phillipswillborrow$20millionforfiveyearsatafixedrateof9%andsimultaneouslylend$20millionatafloatingratetwopercentagepointsabovethethree-monthTreasurybillratewhichiscurrentlyarateof7%.c.Underthetermsoftheswapagreement,Phillipsisobligatedtopay$0.45khdaw.commillionperquarter($20millionat2.25%perquarter)and,inturn,receives$0.40millionperquarter($20millionat2%perquarter).Thatis,Phillipshasanetswappaymentof$0.05millionperquarter.d.Long-termrateshavedecreased,sothepresentvalueofPhillips’long-termborrowinghasincreased.Thus,inordertocanceltheswap,Phillipswillhavetopaythedealer.Theamountpaidisthedifferencebetweenthepresentvaluesofthetwopositions:°Thepresentvalueoftheborrowedmoneyisthepresentvalueof$0.45millionperquarterfor16quarters,plus$20millionatquarter16,evaluatedat2%perquarter(8%annualrate,ortwopercentagepointsoverthelong-termTreasuryrate).Thispresentvalueis$20.68million.课后答案网°Thepresentvalueofthelentmoneyisthepresentvalueof$0.40millionperquarterfor16quarters,plus$20millionatquarter16,evaluatedat2%perquarter.Thispresentvalueis$20million,aswewouldexpect.Becausetheratefloats,thepresentvaluedoesnotwww.hackshp.cnchange.Thus,theamountthatmustbepaidtocanceltheswapis$0.68million.239khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER28ManagingInternationalRisksAnswerstoPracticeQuestions1.Answerswillvary,dependingonwhentheproblemisassigned.2.a.Thedollarissellingataforwardpremiumontherand.⎛6.4662⎞b.4×⎜−1⎟=−0.0762=−7.62%khdaw.com⎝6.5917⎠c.Usingtheexpectationstheoryofexchangerates,theforecastis:$1=6.5917randd.100,000rand=$(100,000/6.5917)=$15,170.593.Wecanutilizetheinterestrateparitytheory:1+rrandfrand/$=1+rs$rand/$课后答案网1+rrand6.5917=⇒r=0.0296=2.96%rand1.016.4662Ifthethree-monthrandinterestrateweresubstantiallyhigherthan2.96%,thenyoucouldmakeanimmediatearbitrageprofitbybuyingrands,investinginawww.hackshp.cnthree-monthranddeposit,andsellingtheproceedsforward.4.Answerswillvarydependingonwhentheproblemisassigned.However,wecansaythatifabankhasquotedaratesubstantiallydifferentfromthemarketrate,anarbitrageopportunityexists.5.Ifinternationalcapitalmarketsarecompetitive,therealcostoffundsinJapanmustbethesameastherealcostoffundselsewhere.Thatis,thelowJapaneseyeninterestrateislikelytoreflecttherelativelylowexpectedrateofinflationinJapanandtheexpectedappreciationoftheJapaneseyen.Notethattheparityrelationshipsimplythatthedifferenceininterestratesisequaltotheexpectedchangeinthespotexchangerate.IfthefundsaretobeusedoutsideJapan,thenMs.Stoneshouldconsiderwhethertohedgeagainstchangesintheexchangerate,andhowmuchthishedgingwillcost.240khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.Suppose,forexample,thattherealvalueoftheeurodeclinesrelativetothedollar.CompetitionmaynotallowLufthansatoraisetrans-Atlanticfaresindollarterms.Thus,ifdollarrevenuesarefixed,Lufthansawillearnfewereuros.ThiswillbeoffsetbythefactthatLufthansa’scostsmaybepartlysetindollars,suchasthecostoffuelandnewaircraft.However,wagesarefixedineuros.Sotheneteffectwillbeafallineuroprofitsfromitstrans-Atlanticbusiness.However,thisisnotthewholestory.Forexample,revenuesmaynotbewhollyindollars.Also,iftrans-Atlanticfaresareunchangedindollars,theremaybeextratrafficfromGermanpassengerswhonowfindthattheeurocostoftravelhasfallen.Inaddition,Lufthansamaybeexposedtochangesinthenominalexchangerate.Forexample,itmayhavebillsforfuelthatareawaitingpayment.Inthiscase,itkhdaw.comwouldlosefromariseinthedollar.NotethatLufthansaispartlyexposedtoacommoditypricerisk(thepriceoffuelmayriseindollars)andpartlytoanexchangeraterisk(theriseinfuelpricesmaynotbeoffsetbyafallinthevalueofthedollar).Insomecases,thecompanycan,toagreatextent,fixthedollarcashflows,suchasbybuyingoilfutures.However,itstillneedsatleastarough-and-readyestimateofthehedgeratios,i.e.,thepercentagechangeincompanyvalueforeach1%changeintheexchangerate.Lufthansacanthenhedgeineithertheexchangemarkets(forwards,futures,oroptions)ortheloanmarkets.7.Supposeafirmhasaknownforeigncurrencyincome(e.g.,aforeigncurrency课后答案网receivable).Evenifthelawofonepriceholds,thefirmisatriskiftheoverseasinflationrateisunexpectedlyhighandthevalueofthecurrencydeclinescorrespondingly.Thefirmcanhedgethisriskbysellingtheforeigncurrencyforwardorbyborrowingforeigncurrencyandsellingitspot.Note,however,thatwww.hackshp.cnthisisarelativeinflationrisk,ratherthanacurrencyrisk;e.g.,ifyouwerelesscertainaboutyourdomesticinflationrate,youmightprefertokeepthefundsintheforeigncurrency.Ifthefirmownsaforeignrealasset(likeOutlandSteel’sinventory),yourworryisthatchangesintheexchangeratemaynotaffectrelativepricechanges.Inotherwords,youareexposedtochangesintherealexchangerate.Youcannotsoeasilyhedgeagainstthesechangesunless,say,youcansellcommodityfuturestofixincomeintheforeigncurrencyandthensellthecurrencyforward.241khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 8.Thedealerestimatesthefollowingrelationshipinordertocalculatethehedgeratio(delta):Expectedchangeincompanyvalue=a+(δ×Changeinvalueofyen)FortheForddealer:Expectedchangeincompanyvalue=a+(5×Changeinvalueofyen)Thus,tofullyhedgeexchangeraterisk,thedealershouldsellyenforwardinanamountequaltofivetimesthecurrentcompanyvalue.9.Thefuturecashflowsfromthetwostrategiesareasfollows:EuroAppreciatestoEuroDepreciatestokhdaw.comSellEuroForward$1.25/euro$1.21/euroi.Donotreceiveorder1,000,000(1.2318)1,000,000(1.2318)(mustbuyeurosatfuture-1,000,000(1.25)=-$18,200-1,000,000(1.21)=$21,800spotratetosettlecontract)ii.Receiveorder(deliver)(inflowof1,000,000eurosto1,000,000(1.2318)=$1,231,8001,000,000(1.2318)=$1,231,800settlecontract)Buy6-MonthEuroAppreciatestoEuroDepreciatestoPutOption$1.25/euro$1.21/euroi.Donotreceiveorder(ifeurodepreciates,buy1,000,000(1.2318)$0eurosatfuturespotrateand课后答案网-1,000,000(1.21)=$21,800exerciseput)ii.Receiveorder(selleurosreceivedatthe1,000,000(1.25)=$1,250,0001,000,000(1.2318)=$1,231,800higherofthespotorputexerciseprice)www.hackshp.cnNotethat,ifthefirmisuncertainaboutreceivingtheorder,itcannotcompletelyremovetheuncertaintyabouttheexchangerate.However,theputoptiondoesplaceadownsidelimitonthecashflowalthoughthecompanymustpaytheoptionpremiumtoobtainthisprotection.10.a.Pesosinvested=1,000×500pesos=500,000pesosDollarsinvested=500,000/10.9815=45,531.12(550−500)×(1000)b.Totalreturninpesos==0.10=10.0%500×1000Dollarsreceived=(550×1000)/12.0=45,833.3345,833.33−45,531.12Totalreturnindollars==0.0066=0.66%45,531.12242khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Therehasbeenareturnontheinvestmentof10%butalossontheexchangerate.11.Todeterminewhetherarbitrageopportunitiesexist,weusetheinterestratetheory.Forexample,wechecktoseewhetherthefollowingrelationshipbetweentheU.S.andCostaguanaholds:1+rfpulgaspulgas/$=1+r$spulgas/$Forthedifferentcurrencies,wehave:RatioofInterestRatioofSpotRatekhdaw.comRatestoForwardRateCostaguana1.1941751.194200Westonia1.0194171.019231Gloccamorra1.0485441.064327Anglosaxophonia1.0106800.991304ForAnglosaxophoniaandGloccamorra,therearearbitrageopportunitiesbecauseinterestrateparitydoesnothold.Forexample,onecouldborrow$1,019at3%today,convert$1,000to2,300wasps,andinvestat4.1%.Thisyields2,394.3waspsinoneyear.Withaforwardcontracttosellthesefordollars,onereceives(2,394.3/2.28)=$1,050dollarsinoneyear.Thisisjustsufficienttorepaythe$1,019loan:$1,019×1.03=$1,049.57The$19differencebetweentheamountborrowed($1,019)andtheamount课后答案网convertedtowasps($1,000)isrisk-freeprofittoday.12.Amajorpointinfinanceisthatriskisundesirableparticularlywhenitcanbewww.hackshp.cnreducedoreliminated.Thisisthepurposeofhedging.Atthetimethehedgewasinitiated,thehedger’sopinionwasthatsterlingwaspricedcorrectly(otherwisethehedgewouldnothavebeenplaced)andthatanydeviationsfromtheexpectedvaluewereunacceptable.12.87719.13418.95325.03324.79724.56313.NPV=−78++++++=$10.12G234561.10(1.10)(1.10)(1.10)(1.10)(1.10)13.46220.38620.58224.24424.47724.712NPV=−80++++++=$10.26S234561.10(1.10)(1.10)(1.10)(1.10)(1.10)243khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Samplecalculations:⎛1.05⎞(1.3×10)×⎜⎟=12.877⎝1.06⎠⎛20⎞⎛1.05⎞⎜⎟×⎜⎟=13.462⎝1.5⎠⎝1.04⎠SincebothprojectshaveapositiveNPV,bothshouldbeaccepted.Ifthefirmmustchoose,thentheSwissplantisthebetterchoice.NotethattheNPVcalculationisindollarsandimplicitlyassumescurrencyhedging.khdaw.com课后答案网www.hackshp.cn244khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.a.Revenuesareindollars,expensesareinSwissfrancs:SwissAirstockpricewilldecline.b.Bothrevenuesandexpensesareinawiderangeofcurrencies,noneofwhichistieddirectlytotheSwissfranc:Nestlestockpricewillbeunaffected.c.Non-Swissfrancmonetarypositionsarehedged,expensesareinSwissfrancs:UBSstockpricewillbeunaffectedormayincrease,dependingonthenatureofthehedge.khdaw.com2.Alphahasrevenuesineurosandexpensesindollars.Ifthevalueoftheeurofalls,itsprofitwilldecrease.Intheshortrun,Alphacouldhedgethisexchangeriskbyenteringintoaforwardcontracttoselleurosfordollars.Omegahasrevenuesindollarsandexpensesineuros.Ifthevalueoftheeurofalls,itsprofitwillincrease.Intheshortrun,Omegacouldhedgethisexchangeriskbyenteringintoaforwardcontracttoselldollarsforeuros.课后答案网www.hackshp.cn245khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER29FinancialAnalysisandPlanningAnswerstoPracticeQuestions1.Internetexercise;answerswillvary.2.Internetexercise;answerswillvary.3.Internetexercise;answerswillvary.khdaw.com4.a.Thefollowingareexamplesofitemsthatmaynotbeshownonthecompany’sbooks:intangibleassets,off-balancesheetdebt,pensionassetsandliabilities(ifthepensionplanhasasurplus),derivativespositions.b.Thevalueofintangibleassetsgenerallydoesnotshowuponthecompany’sbalancesheet.Thisaffectsaccountingratesofreturnbecausebookassetsaretoolow.Itcanalsomakedebtratiosseemhigh,againbecauseassetsareundervalued.Researchanddevelopmentexpendituresaregenerallyrecordedasexpensesratherthanassets,therebyunderstatingincomeandunderstatingassets.Patentsandtrademarks,whichcanbeextremelyvaluableassets,arenotrecordedas课后答案网assetsunlesstheyareacquiredfromanothercompany.5.Theanswer,asinallquestionspertainingtofinancialratios,is,“Itdependsonwww.hackshp.cnwhatyouwanttousethemeasurefor.”Formostpurposes,afinancialmanagerisconcernedwiththemarketvalueoftheassetssupportingthedebt,but,sinceintangibleassetsmaybeworthlessintheeventoffinancialdistress,theuseofbookvaluesmaybeanacceptableproxy.Youmayneedtolookatthemarketvalueofdebt,e.g.,whencalculatingtheweightedaveragecostofcapital.However,ifyouareconcernedwith,say,probabilityofdefault,youareinterestedinwhatafirmhaspromisedtopay,notnecessarilyinwhatinvestorsthinkthatpromiseisworth.Lookingatthefacevalueofdebtmaybemisleadingwhencomparingfirmswithdebthavingdifferentmaturities.Afterall,acertainpaymentof$1,000tenyearsfromnowisworthlessthanacertainpaymentof$1,000nextyear.Therefore,iftheinformationisavailable,itmaybehelpfultodiscountfacevalueattherisk-freerate,i.e.,calculatethepresentvalueoftheexercisepriceontheoptiontodefault.(Mertonreferstothismeasureasthequasi-debtratio.)246khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Youshouldnotexcludeitemsjustbecausetheyareoff-balance-sheet,butyouneedtorecognizethattheremaybeotheroffsettingoff-balance-sheetitems,e.g.,thepensionfund.Howyoutreatpreferredstockdependsuponwhatyouaretryingtomeasure.Preferredstockislargelyafixedchargethataccentuatestheriskofthecommonstock.Ontheotherhand,asfaraslendersareconcerned,preferredstockisajuniorclaimonfirmassets.Deferredtaxreservesarisebecausecompaniestypicallyuseaccelerateddepreciationfortaxcalculationswhiletheyusestraight-linedepreciationforfinancialreporting.Intheeventthatthecompany’sinvestmentslowsdownorceases,thistaxwouldbecomepayable,but,formostcompanies,deferredtaxkhdaw.comreservesareapermanentfeature.Minorityinterestsarisebecausethecompanyconsolidatesalltheassetsofitssubsidiarieseventhoughsomesubsidiariesmaybelessthan100%owned.Minorityinterestsreflecttheportionoftheequityofthesesubsidiariesthatisnotownedbythecompany’sshareholders.Formostpurposes,itmakessensetoexcludedeferredtaxandminorityinterestsfrommeasuresofleverage.6.a.Liquidityratios:1.Networkingcapitaltototalassets=(900+300)−(460+300)=0.251(decrease)课后答案网1450+3002.900+300Currentratio==1.58(decrease)460+300www.hackshp.cn110+300+4403.Quickratio==1.12(decrease)460+300110+3004.Cashratio==0.539(increase)460+300110+300+4405.Intervalmeasure==156.7days(increase)1980÷365247khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com b.Leverageratios:1.TheDebtRatioandtheDebt-EquityRatiowouldbeunchangedat0.45and0.83,respectively.Thesecalculationsinvolveonlylong-termdebt,leasesandequity,noneofwhichisaffectedbyashort-termloanthatincreasescash.However,theDebtRatio(includingshort-termdebt)changesfrom0.50to0.61,asshownbelow:100+450=0.50100+450+540100+450+300=0.61khdaw.com100+450+540+3002.Timesinterestearnedwoulddecreasebecauseapproximatelythesameamountwouldbeaddedtothenumerator(interestearnedonthemarketablesecurities)andthedenominator(interestexpenseassociatedwiththeshort-termloan).7.Theeffectonthecurrentratioofthefollowingtransactions:a.Inventoryissold⇒noeffectb.Thefirmtakesoutabankloantopayitssuppliers⇒noeffectc.Acustomerpaysitsoverduebills课后答案网⇒noeffectd.Thefirmusescashtopurchaseadditionalinventories⇒noeffect8.Afterthemerger,saleswillbe$100,assetswillbe$70,andprofitwillbe$14.www.hackshp.cnThefinancialratiosforthefirmsare:FederalStoresSaraTogasMergedFirmSales-to-Assets2.001.001.43ProfitMargin0.100.200.14ROA0.200.200.20Notethatthecalculationofprofitisstraightforwardinonesense,butinanotheritissomewhatcomplicated.Beforethemerger,Federal’scostofgoodsincludesthe$20itpurchasesfromSara,andSara’scostofgoodssoldis:($20–$4)=$16Afterthemerger,therefore,thecostofgoodssoldwillbe:($90–$20+$16)=$86Withsalesof$100,profitwillbe$14.9.Thedividendpershareis$2andthedividendyieldis4%,sothestockpricepershareis$50.Amarket-to-bookratioof1.5indicatesthatthebookvaluepershareis2/3ofthemarketprice,or$33.33.Thenumberofoutstandingsharesis10million,sothatthebookvalueofequityis$333.3million.248khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10.Totalliabilities+Equity=115⇒Totalassets=115Totalcurrentliabilities=30+25=55Currentratio=1.4⇒Totalcurrentassets=1.4×55=77Cashratio=0.2⇒Cash=0.2×55=11Quickratio=1.0⇒Cash+Accountsreceivable=currentliabilities=55⇒Accountsreceivable=44Totalcurrentassets=77=Cash+Accountsreceivable+Inventory⇒Inventory=22Totalassets=Totalcurrentassets+Fixedassets=115⇒Fixedassets=38Long-termdebt+Equity=115–55=60Financialleverage=0.4=Long-termdebt/(Long-termdebt+Equity)⇒Long-termdebt=24khdaw.comEquity=60–24=36Averageinventory=(22+26)/2=24Inventoryturnover=5.0=(Costofgoodssold/Averageinventory)⇒Costofgoodssold=120Averagereceivables=(34+44)/2=39Receivables’collectionperiod=71.2=Averagereceivables/(Sales/365)⇒Sales=200EBIT=200–120–10–20=50Times-interest-earned=11.2=(EBIT+Depreciation)/Interest⇒Interest=6.27Earningsbeforetax=50–6.27=43.73Averagetotalassets=(105+115)/2=110Returnontotalassets=0.18=(EBIT–Tax)/Averagetotalassets⇒Tax=30.2Averageequity=(30+36)/2=33课后答案网Returnonequity=0.41=Earningsavailableforcommonstock/averageequity⇒Earningsavailableforcommonstockholders=13.53Theresultis:www.hackshp.cnFixedassets$38Sales200.0Cash11Costofgoodssold120.0Accountsreceivable44Selling,general,andInventory22Administrative10.0Totalcurrentassets77Depreciation20.0TOTAL$115EBIT50.0Equity$36Interest6.27Long-termdebt24Earningsbeforetax43.73Notespayable30Tax30.20Accountspayable25Availableforcommon13.53Totalcurrentliabilities55TOTAL$115249khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 11.Twoobviouschoicesare:a.Totalindustryincomeovertotalindustrymarketvalue:CompanyABCDETotalNetincome100.56.67-1.06.6722.84Marketvalue3002010040100560Price/earnings=560/22.84=24.5b.Averageoftheindividualcompanies’P/Es:CompanyABCDEEPS3.330.1253.34-0.200.67Shareprice100550810P/E304015-4015khdaw.comAverageP/E=12.0Clearly,themethodofcalculationhasasubstantialimpactontheresult.Thefirstmethodisgenerallypreferable.Here,thesecondmethodgivestoomuchweighttoCompanyD,whichisasmallcompanyandhasanegativeP/Ethatislargeinabsolutevalue.12.Rapidinflationdistortsvirtuallyeveryitemonafirm’sbalancesheetandincomestatement.Forexample,inflationaffectsthevalueofinventory(and,hence,costofgoodssold),thevalueofplantandequipment,thevalueofdebt(bothlong-termandshort-term);andsoon.Giventhesedistortions,therelevanceofthenumbersrecordedisgreatlydiminished.课后答案网Thepresenceofdebtintroducesmoredistortions.Asmentionedabove,thevalueofdebtisaffected,butsoistheratedemandedbybondholders,whoincludetheeffectsofinflationintheirlendingdecisions.www.hackshp.cn13.Allofthefinancialratiosarelikelytobehelpful,althoughtovaryingdegrees.Presumably,thoseratiosthatrelatedirectlytothevariabilityofearningsandthebehaviorofthestockpricehavethestrongestassociationswithmarketrisk;likelycandidatesincludethedebt-equityratioandtheP/Eratio.Otheraccountingmeasuresofriskmightbedevisedbytakingfive-yearaveragesoftheseratios.14.Answerswillvarydependingoncompaniesandindustrieschosen.15.Bottom-upmodelsmaybeexcessivelydetailedandcanpreventmanagersfromseeingtheforestforthetrees.However,ifthefirmhasdiverseoperationsorlarge,discreteinvestments,itmaybeessentialtoforecastseparatelyforindividualdivisionsorprojects.Thus,wewouldexpectconglomeratesorcompanieswithindividuallylargeprojects(e.g.,Boeing)touseabottom-upapproach.250khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Itiseasiertoexpressandimplementcorporatestrategywithatop-downmodel.Weexpecttofindsuchmodelsusedforhomogeneousbusinesses,especiallywheregrowthisrapid,marketsarechanging,andintangibleassetsareimportant.Ofcourse,thedangeristhatsuchmodelslosecontactwithplant-by-plant,product-by-productdevelopmentsthataretheactivitiesthatactuallygenerateprofitsandgrowth.Itisgenerallyeasiertoevaluateperformanceifthedetailofabottom-upmodelisavailable.16.Theabilitytomeetorbeatthetargetsembodiedinafinancialplanisobviouslyareassuringsignalofmanagementtalentandmotivation.Moreover,thefinancialkhdaw.complanfocusesattentiononthespecifictargetsthattopmanagementdeemsmostimportant.Thereare,however,severaldangers.a.Financialplansareusuallyaccounting-based,andthus,aresubjecttothebiasesinherentinbookprofitabilitymeasures.b.Managersmaysacrificethefirm’sbestlong-terminterestsinordertomeettheplan’sshort-ormedium-runtargets.c.ManagerAmaymakealltherightdecisions,butfailtomeettheplanbecauseofeventsbeyondhiscontrol.ManagerBmaymakethewrongdecisions,butberescuedbygoodluck.Inotherwords,itmaybedifficulttoseparateperformanceandabilityfromresults.课后答案网17.Afinancialmodeldescribesaseriesofrelationshipsamongfinancialvariables.Giventheserequiredrelationships,itmightnotbepossibletofindasolutionunlessonevariableisunconstrained.Thisallowsallstatedrelationshipstobemetbysettingtheunconstrainedvariable,calledthe“balancingitem,”atthelevelwww.hackshp.cnrequiredsothattheBalanceSheetandtheSourcesandUsesStatementarereconciled.Ifdividendsweremadethebalancingitem,thenanequationrelatingborrowingtosomeothervariablewouldberequired.18.FromTable29.6,weseethat,in2003,totalusesoffundsequals$312.Sincetotalsourcesoffundsequals$153.4,thefirmrequires$158.6ofexternalcapital(assumingdividendsof$59.0).Ifnodividendsarepaid,thefirm’sexternalfinancingrequiredis:$158.6–$59.0=$99.6251khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 19.a.ProFormaIncomeStatement200220032004Revenues2,200.02,860.03,718.0Costs(90%ofrevenues)1,980.02,574.03,346.2Depreciation(10%offixedassetsatstartofyear)53.355.071.5EBIT166.7231.0300.3Interest(10%oflong-termdebtatstartofyear)42.545.070.2Tax(40%ofpretaxprofit)49.774.492.0NetIncome74.5111.6138.1Operatingcashflow127.8166.6209.6khdaw.comProFormaSources&UsesofFunds200220032004SourcesNetIncome74.5111.6138.1Depreciation53.355.071.5Operatingcashflow127.8166.6209.6Issuesoflong-termdebt25.0252.4330.9Issuesofequity0.00.00.00Totalsources152.8419.0540.5UsesIncreaseinnetworkingcapital38.5132.0171.6Investmentinfixedassets课后答案网70.5220.0286.0Dividends43.867.082.9Totaluses152.8419.0540.5Externalcapitalrequired25.0252.4330.9www.hackshp.cnProFormaBalanceSheet200220032004Networkingcapital(20%ofrevenues)440.0572.0743.6Netfixedassets(25%ofrevenues)550.0715.0929.5Totalnetassets990.01,287.01,673.1Long-termdebt450.0702.41,033.3Equity540.0584.6639.8Totallong-termliabilitiesandequity990.01287.01,673.1b.Fortheyear2003,thefirm’sdebtratiois:$702.4/$1,287.0=0.546andtheinterestcoverageratiois:($231+$55)/$45=6.356Fortheyear2004,thefirm’sdebtratiois:$1,033.3/$1,673.1=0.618andtheinterestcoverageratiois:($300.3+$71.5)/$70.2=5.296c.Itwouldbedifficulttofinancecontinuinggrowthatthisratebyborrowingalone.Thedebtratioisalreadyveryhigh,andiscontinuingtoincrease.252khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 20.a.&b.ProFormaIncomeStatement20042005Revenue1,785.02,100.0Fixedcosts53.053.0Variablecosts(80%ofrevenue)1,428.01,680.0Depreciation80.0100.0EBIT224.0267.0Interest(at11.8%)24.028.3Taxes(at40%)80.095.5NetIncome120.0143.2Operatingcashflow200.0243.2khdaw.comProFormaSources&UsesofFunds20042005SourcesNetIncome120.0143.2Depreciation80.0100.0Operatingcashflow200.0243.2Issuesoflong-termdebt36.030.0Issuesofequity104.072.3Totalsources340.0345.5UsesIncreaseinnetworkingcapital60.050.0Investmentinfixedassets200.0200.0Dividends80.0课后答案网95.5Totaluses340.0345.5Externalcapitalrequired140.0102.3ProFormaBalanceSheet20042005Networkingcapitalwww.hackshp.cn400.0450.0Netfixedassets800.0900.0Totalnetassets1,200.01,350.0Long-termdebt240.0270.0Equity960.01,080.0Totallong-termliabilitiesandequity1,200.01,350.0253khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 21.a.Withagrowthrateof15%,totalassetswillincreaseto$3,450,implyingrequiredfundingof$450.Withagrowthrateof15%andusingataxrateof($200/$700)=28.57%,Eagle’sIncomeStatementfor2006willbe:Sales$1,092.5Costs287.5EBIT805.0Taxes230.0NetIncome$575.0Dividendswillbe:0.6×$575=$345Retainedearningswillbe:0.4×$575=$230Thus,theneededexternalfundswillbe:$450–$230=$220khdaw.comb.Debtmustbethebalancingitem,andwillincreaseby$220toatotalvalueof$1,220.c.Withnonewsharesofstock,anddebtincreasedby$100,theonlyothersourceoftheadditional$120isretainedearnings,whichmustincreaseto$350.Dividendswillthusbereducedto$225.22.a.Internalgrowthrate=retainedearnings/netassetsInternalgrowthrate=$230/$3000=0.077=7.7%课后答案网RENIb.Sustainablegrowthrate=Plowbackratio×Returnonequity=×NIEquity575Sustainablegrowthrate=0.4×=0.115=11.5%www.hackshp.cn200023.a.retainedearningsEquityInternalgrowthrate==Plowbackratio×ROE×netassetsNetassets0.20×1,000,000×0.40Internalgrowthrate==0.40×0.20×1.0=0.08=8.0%1,000,000b.Theneedforexternalfinancingisequaltotheincreaseinassetslesstheretainedearnings:(0.30×1,000,000)–(0.20×1,000,000×0.40)=$220,000254khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com c.Withnodividends,theplowbackratiobecomes1.0and:0.20×1,000,000×1.0Internalgrowthrate==0.20=20.0%1,000,000d.Retainedearningswillnowbe$200,000andtheneedforexternalfundsisreducedto$100,000.Clearly,themoregenerousthedividendpolicy(i.e.,thehigherthepayoutratio),thegreatertheneedforexternalfinancing.khdaw.com课后答案网www.hackshp.cn255khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Becausebothcurrentassetsandcurrentliabilitiesare,bydefinition,short-termaccounts,‘netting’themoutagainsteachotherandthencalculatingtheratiointermsoftotalcapitalizationispreferablewhenevaluatingthesafetyoflong-termdebt.Havingdonethis,thebankloanwouldnotbeincludedindebt.Whetherornottheotheraccounts(i.e.,deferredtaxes,R&Rreserve,andtheunfundedpensionliability)areincludedinthecalculationwoulddependonthetimehorizonofinterest.Alloftheseaccountsrepresentlong-termobligationsofthefirm.IfthegoalistoevaluatethesafetyofGeomorph’sdebt,thekeyquestionis:Whatisthematurityofthisdebtrelativetotheobligationskhdaw.comrepresentedbytheseaccounts?Ifthedebthasashortermaturity,thentheyshouldnotbeincludedbecausethedebtis,ineffect,aseniorobligation.Ifthedebthasalongermaturity,thentheyshouldbeincluded.[Itmaybeofinteresttonoteherethatsomecompanieshaverecentlyissueddebtwithamaturityof100years.]2.Internetexercise;answerswillvary.课后答案网www.hackshp.cn256khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER30WorkingCapitalManagementAnswerstoPracticeQuestions1.a.Thereisa2%discountifthebillispaidwithin30daysoftheinvoicedate;otherwise,thefullamountisduewithin60days.b.Thereisa2%discountifpaymentismadewithin5daysoftheendofthemonth;otherwise,thefullamountisduewithin30daysoftheinvoicedate.c.Cashondelivery.Paymentisdueinfullamountoftheinvoiceuponkhdaw.comdeliveryofgoods.2.a.Payingin60days(asopposedto30)islikepayinginterestof$2ona$98loanfor30days.Therefore,theequivalentannualrateofinterest,withcompounding,is:(365/30)⎛100⎞⎜⎟−1=0.2786=27.86%⎝98⎠b.Forapurchasemadeattheendofthemonth,thesetermsallowthebuyertotakethediscountforpaymentsmadewithinfivedays,ortopaythefull课后答案网amountwithinthirtydays.Forthesepurchases,theinterestrateiscomputedasfollows:(365/25)⎛100⎞⎜www.hackshp.cn⎟−1=0.3431=34.31%⎝98⎠Allsalesaretreatedasiftheyweremadeattheendofthemonth;therefore,theabovecalculationiscorrectforallsales.3.Whenthecompanysellsitsgoodscashondelivery,foreach$100ofsales,costsare$95andprofitis$5.Assumenowthatcustomerstakethecashdiscountofferedunderthenewterms.Saleswillincreaseto$104,butafterrebatingthecashdiscount,thefirmreceives:0.98×$104=$101.92Sincecustomerspaywithaten-daydelay,thepresentvalueofthesesalesis:$101.92=$101.757(10/365)1.06Sincecostsremainunchangedat$95,profitbecomes:$101.757–$95=$6.757257khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com Ifcustomerspayonday30andsalesincreaseto$104,thenthepresentvalueofthesesalesis:$104=$103.503(30/365)1.06Profitbecomes:$103.503–$95=$8.503Ineithercase,grantingcreditincreasesprofits.4.Themorestringentpolicyshouldbeadoptedbecauseprofitwillincrease.Forevery$100ofcurrentsales:CurrentMoreStringentkhdaw.comPolicyPolicySales$100.0$95.0Less:BadDebts*6.03.8Less:CostofGoods**80.076.0Profit$14.0$15.2*6%ofsalesundercurrentpolicy;4%underproposedpolicy**80%ofsales5.ConsidertheNPV(per$100ofsales)forsellingtoeachofthefourgroups:ClassificationNPVper$100Sales课后答案网100×(1−0)1−85+=$13.2945/3651.15100×(1−0.02)2www.hackshp.cn−85+=$11.4442/3651.15100×(1−0.10)3−85+=$3.6340/3651.15100×(1−0.20)4−85+=−$7.4180/3651.15Ifcustomerscanbeclassifiedwithoutcost,thenVelcroshouldsellonlytoGroups1,2and3.Theexceptionwouldbeifnon-defaultingGroup4accountssubsequentlybecameregularandreliablecustomers(i.e.,membersofGroup1,2or3).Inthatcase,extendingcredittonewGroup4customersmightbeprofitable,dependingontheprobabilityofrepeatbusiness.258khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.Bymakingacreditcheck,VelcroSaddlesavoidsa$7.41lossper$100sale25percentofthetime.Thus,theexpectedbenefit(lossavoided)fromacreditcheckis:0.25×$7.41=$1.85per$100ofsales,or1.85%Acreditcheckisnotjustifiedifthevalueofthesaleislessthanx,where:0.0185x=$95x=$5,1357.Originalterms:khdaw.com$100NPVper$100sales=−$80+=$17.7075/3651.12Changedterms:Assumetheaveragepurchaseisatmid-monthandthatthemonthshave30days.0.60×$980.40×$100NPVper$100sales=−$80++=$17.2730/36580/3651.121.128.Forevery$100ofpriorsales,thefirmnowhassalesof$102.Thus,thecostofgoodssoldincreasesby2%,asdosales,bothcashdiscountandnet:课后答案网NPVper$100ofinitialsales=1.02×$17.27=$17.629.Internetexercise;answerswillvary.www.hackshp.cn10.a.Knobcollects$180millionperyear,or(assuming360daysperyear)$0.5millionperday.Ifthefloatisreducedbythreedays,thenKnobgainsbyincreasingaveragebalancesby$1.5million.b.Thelineofcreditcanbereducedby$1.5million,forsavingsperyearof:$1,500,000×0.12=$180,000c.Thecostoftheoldsystemis$40,000plustheopportunitycostoftheextrafloatrequired($180,000),or$220,000peryear.Thecostofthenewsystemis$100,000.Therefore,Knobwillsave$120,000peryearbyswitchingtothenewsystem.259khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 11.a.Anincreaseininterestratesshoulddecreasecashbalances,becauseanincreasedinterestrateimpliesahigheropportunitycostofholdingcash.b.Adecreaseinvolatilityofdailycashflowshoulddecreasecashbalances.c.Anincreaseintransactioncostsshouldincreasecashbalancesanddecreasethenumberoftransactions.12.Thecostofawiretransferis$10,andthecashisavailablethesameday.Thecostofacheckis$0.80plusthelossofinterestforthreedays,or:khdaw.com$0.80+[0.12×(3/365)×(amounttransferred)]Settingthisequalto$10andsolving,wefindtheminimumamounttransferredis$9,328.13.a.Thelock-boxwillcollectanaverageof($300,000/30)=$10,000perday.ThemoneywillbeavailablethreedaysearliersothiswillincreasethecashavailabletoJACby$30,000.Thus,JACwillbebetteroffacceptingthecompensatingbalanceoffer.Thecostis$20,000,butthebenefitis$30,000.b.Letxequaltheaveragechecksizeforbreak-even.Then,thenumberofcheckswrittenpermonthis(300,000/x)andthemonthlycostofthelock-课后答案网boxis:(300,000/x)(0.10)Thealternativeisthecompensatwww.hackshp.cningbalanceof$20,000.Themonthlycostisthelostinterest,whichisequalto:(20,000)(0.06/12)Thesecostsareequalifx=$300.Thus,iftheaveragechecksizeisgreaterthan$300,payingpercheckislesscostly;iftheaveragechecksizeislessthan$300,thecompensatingbalancearrangementislesscostly.c.Inpart(a),wecompareavailabledollarbalances:theamountmadeavailabletoJACcomparedtotheamountrequiredforthecompensatingbalance.Inpart(b),onecostiscomparedtoanother.Theinterestforegonebyholdingthecompensatingbalanceiscomparedtothecostofprocessingchecks,andsohereweneedtoknowtheinterestrate.260khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 14.Priceofthree-monthTreasurybill=100–[(3/12)×10]=97.504Yield=(100/97.50)–1=0.1066=10.66%Priceofsix-monthTreasurybill=100–[(6/12)×10]=95.002Yield=(100/95.00)–1=0.1080=10.80%Therefore,thesix-monthTreasurybilloffersthehigheryield.15.Theannuallycompoundedyieldof5.18%isequivalenttoatwo-monthyieldof:(2/12)1.0518–1=0.008453=0.8453%khdaw.comTheprice(P)mustsatisfythefollowing:(100/P)–1=0.008453Therefore:P=$99.1618Thereturnforthemonthis:($99.1618/$98.75)–1=0.004170Theannuallycompoundedyieldis:121.004170–1=0.0512=5.12%16.Priceoftheone-monthbillis:100–[(1/12)课后答案网×5]=99.58Returnoveronemonthis:($100/$99.58)–1=0.004184=0.4184%Yield(onasimpleinterestbasis)is:0.004184×12=0.05021=5.021%www.hackshp.cnRealizedreturnovertwomonthsis:($99.58/$98.75)–1=0.0084=0.84%17.Answersherewillvarydependingonwhentheproblemisassigned.18.LetX=theinvestor’smarginaltaxrate.Then,theinvestor’safter-taxreturnisthesamefortaxableandtax-exemptsecurities,sothat:0.0352(1–X)=0.0244Solving,wefindthatX=0.3068=30.68%,sothattheinvestor’smarginaltaxrateis30.68%.Numerousotherfactorsmightaffectaninvestor’schoicebetweenthetwotypesofsecurities,includingthesecurities’respectivematurities,defaultrisk,couponrates,andoptions(suchascalloptions,putoptions,convertibility).261khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 19.IftheIRSdidnotprohibitsuchactivity,thencorporateborrowerswouldborrowataneffectiveafter-taxrateequalto[(1–taxrate)×(rateoncorporatedebt)],inordertoinvestintax-exemptsecuritiesifthisafter-taxborrowingrateislessthantheyieldontax-exempts.Thiswouldprovideanopportunityforrisk-freeprofits.20.Fortheindividualpaying35percenttaxonincome,theexpectedafter-taxyieldsare:a.Onmunicipalnote:7.0%b.OnTreasurybill:0.10×(1–0.35)=0.065=6.5%c.Onfloating-ratepreferred:0.075×(1–0.35)=0.04875=4.875%Foracorporationpaying35percenttaxonincome,theexpectedafter-taxkhdaw.comyieldsare:a.Onmunicipalnote:7.0%b.OnTreasurybill:0.10×(1–0.35)=0.065=6.50%c.Onfloating-ratepreferred(acorporateinvestorexcludesfromtaxableincome70%ofdividendspaidbyanothercorporation):Tax=0.075×(1-0.70)×0.35=0.007875After-taxreturn=0.075–0.007875=0.067125=6.7125%Twoimportantfactorstoconsider,otherthantheaftertaxyields,arethecreditriskoftheissuerandtheeffectofinterestratechangesonlong-termsecurities.课后答案网www.hackshp.cn262khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.[Note:inthefollowingsolution,wehaveassumedaninterestrateof10%.]Atapurchasepriceof$10,thesalesof30,000umbrellaswillgenerate$300,000insalesand$47,000inprofit.Itfollowsthatthecostofgoodssoldis:($300,000-$47,000)/30,000=$8.43perumbrellaAssumethat,ifPlumptonpays,itdoessoontheduedate.Then,ata10percentinterestrate,thenetpresentvalueofprofitperumbrellais:NPVperumbrella=PV(Salesprice)–Costofgoods(60/365)khdaw.comNPVperumbrella=[$10/(1.10)]–$8.43=$1.41(IfPlumptonpays30daysslow,i.e.,in90days,thentheNPVfallsto$1.34)Thus,thesaleshaveapositiveNPViftheprobabilityofcollectionexceeds86percent.However,ifReliantthinksthissalemayleadtomoreprofitablesalesinNevada,thenitmaygoaheadeveniftheprobabilityofcollectionislessthan86percent.RelevantcreditinformationincludesafairDunandBradstreetrating,butsomeindicationofcurrenttrouble(i.e.,othersuppliersreportPlumptonpaying30daysslow)andindicationsoffuturetrouble(apendingre-negotiationofatermloan).Financialratioscanbecalculatedandcomparedwiththosefortheindustry.Debtratio课后答案网=0.15Networkingcapital/totalassets=0.39Currentratio=2.2Quickratio=0.40Sales/totalassetswww.hackshp.cn=3.0Netprofitmargin=0.020=2.0%Inventoryturnover=2.9Returnontotalassets=0.059=5.9%Returnonequity=0.054=5.4%Somethingsthecreditmanagershouldconsiderare:i.WhatdoesthestockmarketseemtobesayingaboutPlumpton?ii.Howcriticalisthetermloanrenewal?Canwegetmoreinformationaboutthisfromthebankordelaythecreditdecisionuntilafterrenewal?iii.Isthereanywaytomakethedebtmoresecure,e.g.,useapromissorynote,timedraft,orconditionalsale?iv.ShouldReliantseektoreducerisk,e.g.,byalowerinitialorderorcreditinsurance?HowpainfulwoulddefaultbetoReliant?v.Whatalternativesareavailable?AretherebetterwaystoentertheNevadamarket?Whatisthecompetition?263khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 2.a.Forevery$100incurrentsales,Galenichas$5.0profit,ignoringbaddebts.Thisimpliesthecostofgoodssoldis$95.0.Ifthebaddebtratiois1%,thenper$100salesthebaddebtswillbe$1andactualprofitwillbe$4.0,anetprofitmarginof4%.b.Saleswillfallto91.6%oftheirpreviouslevel(9,160/10,000),orto$91.6per$100oforiginalsales.Withacostofgoodssoldratioof95%,CGSwillbe$87.0.Baddebtswillbe:(0.007×91.6)=$0.64Therefore,theprofitunderthenewscoringsystem,per$100oforiginalsales,willbe$4.0.Profitwillbeunaffected.c.Therearemanyreasonswhythepredictedandactualdefaultratesmaydiffer.Forexample,thecreditscoringsystemisbasedonhistoricaldatakhdaw.comanddoesnotallowforchangingcustomerbehavior.Also,theestimationprocessignoresdatafromloanapplicationsthathavebeenrejected,whichmayleadtobiasesinthecreditscoringsystem.Ifacompanyoverestimatestheaccuracyofthecreditscoringsystem,itwillrejecttoomanyapplications.d.IfoneofthevariablesiswhetherthecustomerhasanaccountwithGalenic,thecreditscoringsystemislikelytobebiasedbecauseitwillignorethepotentialprofitfromnewcustomerswhomightgeneraterepeatorders.课后答案网www.hackshp.cn264khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER31Short-termFinancialPlanningAnswerstoPracticeQuestions1.Unlessotherwisestatedintheproblem,assumeallexpensesareforcash.FebruaryMarchAprilSourcesofcashCollectionsoncashsales$100$110$90Collectionsonaccountsreceivable90100110Totalsourcesofcash190210200Usesofcashkhdaw.comPaymentsofaccountspayable304030Cashpurchasesofmaterials708060Otherexpenses303030Capitalexpenditures10000Taxes,interest,anddividends101010Totalusesofcash240160130Netcashinflow-505070Cashatstartofperiod10050100+Netcashinflow-505070=Cashatendofperiod课后答案网50100170+Minimumoperatingcashbalance100100100=Cumulativeshort-termfinancingrequired$50$0$0www.hackshp.cn2.30-DayDelay:Thisquarteritwillpay1/3oflastquarter’spurchasesand2/3ofthisquarter’s.60-DayDelay:Thisquarteritwillpay2/3oflastquarter’spurchasesand1/3ofthisquarter’s.3.a.Riseininterestrates:Interestpaymentsonbankloanandinterestonmarketablesecurities.b.Interestforlatepayments:Stretchingpayables;netnewborrowing.c.Underpaymentoftaxes:Cashrequiredforoperations.(Bearinmind,however,thatifanyoftheseeventswereunforeseen,theywouldnotappearinthefinancialplan,whichisconstructedwellinadvanceofthebeginningofthefirstquarter.)265khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 4.SourcesandUsesofCash:SourcesSoldmarketablesecurities2Increasedbankloans1Increasedaccountspayable5Cashfromoperations:Netincome6Depreciation2Totalsources16UsesIncreasedinventories6Increasedaccountsreceivable3khdaw.comInvestedinfixedassets6Dividend1Totaluses16Increaseincashbalance0SourcesandUsesofFunds:SourcesCashfromoperationsNetincome6Depreciation2Totalsources8UsesInvestedinfixedassets课后答案网6Dividend1Totaluses7Increaseinnetworkingcapitalwww.hackshp.cn1266khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.Thenewplanisshownbelow:FirstSecondThirdFourthQuarterQuarterQuarterQuarterNewborrowing:1.Bankloan41.508.500.000.002.Stretchingpayables0.007.640.000.003.Total41.5016.140.000.00Repayments:4.Bankloan0.000.0016.5933.415.Stretchingpayables0.000.007.640.006.Total0.000.0024.2333.41khdaw.com7.Netnewborrowing41.5016.14-24.23-33.418.Plussecuritiessold5.000.000.000.009.Lesssecuritiesbought0.000.000.040.6510.Totalcashraised46.5016.14-24.27-34.06Interestpayments:11.Bankloan0.001.041.250.8412.Stretchingpayables0.000.000.380.0013.Interestonsecuritiessold0.000.100.100.1014.Netinterestpaid0.001.141.730.9415.Cashrequiredforoperations46.5015.00-26.00-35.0016.Totalcashrequired46.5016.14-24.27-34.06课后答案网www.hackshp.cn267khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.a.FirstSecondThirdFourthQuarterQuarterQuarterQuarterSourcesofcash:Collectionsonaccountsreceivable85.080.3108.5128.0Other0.00.012.50.0Totalsources85.080.3121.0128.0Usesofcash:Paymentsonaccountspayable65.060.055.050.0Labor,administrative,other30.030.030.030.0Capitalexpenditures2.51.35.58.0Lease1.51.51.51.5khdaw.comTaxes,interest,anddividends4.04.04.55.0Totaluses103.096.896.594.5Sources-uses-18.0-16.524.533.5Calculationofshort-termfinancingrequirement1.Cashatstartofperiod5.0-13.0-29.5-5.02.Changeincashbalance-18.0-16.524.533.53.Cashatendofperiod-13.0-29.5-5.028.54.Minimumoperatingcashbalance5.05.05.05.0Cumulativeshort-termfinancing18.034.510.0-23.5required.课后答案网www.hackshp.cn268khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.b.FirstSecondThirdFourthQuarterQuarterQuarterQuarterNewborrowing:1.Bankloan13.0016.930.000.002.Stretchingpayables0.000.000.000.003.Total13.0016.930.000.00Repayments:4.Bankloan0.000.0023.656.285.Stretchingpayables0.000.000.000.006.Total0.000.0023.656.28khdaw.com7.Netnewborrowing13.0016.93-23.65-6.288.Plussecuritiessold5.000.000.000.009.Lesssecuritiesbought0.000.000.0026.9410.Totalcashraised18.0016.93-23.65-33.22Interestpayments:11.Bankloan0.000.330.750.1612.Stretchingpayables0.000.000.000.0013.Interestonsecuritiessold0.000.100.100.1014.Netinterestpaid0.000.430.850.2615.Cashrequiredforoperations18.0016.50-24.50-33.5016.Totalcashrequired课后答案网18.0016.93-23.65-33.247.Newspaperexercise;answerswillvarydependingontimeperiod.www.hackshp.cn8.Thefollowingassetsaremostlikelytobegoodcollateral:a⇒atankerloadoffuelintransitfromtheMiddleEastc⇒anaccountreceivableforofficesuppliessoldtotheCityofNewYorkg⇒100ouncesofgoldh⇒aportfolioofTreasurybillsThefollowingassetsarelikelytobebadcollateral:b⇒1,000casesofBeaujolaisNouveau,becauseitmightdepreciatequicklyandbedifficulttovalue.d⇒aninventoryof15,000usedbooks,becausethesearedifficulttovalue.e⇒aboxcarfullofbananas,becauseitwilldepreciatequickly.f⇒aninventoryofelectrictypewriters,becausetheyareobsolete.i⇒ahalf-completedluxuryyacht,becauseithaslittlevalueunlesscompleted.9.Internetexercise;answerswillvary.269khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10.Internetexercise;answerswillvary.khdaw.com课后答案网www.hackshp.cn270khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.AxleChemical’sexpectedrequirementforshort-termfinancingis:(0.5×$1,000,000)+(0.2×$0)+(0.3×$2,000,000)=$1,100,000IfAxleChemicaltakesouta90-dayunsecuredloanfor$2million,thentheinterestpaidattheendofthe90daysis:3$2,000,000×[(1.01)–1]=$60,602Underthisarrangement,theexpectedcashsurplusis:$2,000,000-$1,100,000=$900,000khdaw.comThissurpluswillearninterestforanaverageperiodof1.5monthsata9%annualrate,fortotalinterestof:1.5$900,000×[(1.0075)–1]=$10,144Therefore,theexpectednetcostofborrowingis:$60,602-$10,144=$50,458IfAxleChemicalusesthecreditline,thenthefuturevalueofthe$20,000commitmentfeeis:3$20,000×1.01=$20,606Assumingthatthecashrequirementaccumulatessteadilyduringthequarter,the课后答案网averagematurityoftheloanis1.5monthsandtheexpectedinterestcostis:1.5$1,100,000×[(1.01)–1]=$16,541Thetotalcostofthecreditlineistherefore:$20,606+$16,541=$37,147.Thewww.hackshp.cncreditlinehasthelowerexpectedcost.2.Themainpointstobeconsideredare:•Thecommercialpaperischeaperthanthebankloan(9%comparedto10%).Largefirmswithgoodcreditratingscanusuallyreducethecostofcreditbynotborrowingfromabank.•Ontheotherhand,thefirmwillneedtorolloverthecommercialpapertentimes.Thatisacceptableaslongasthefirm’screditratingremainsgood,butcommercialpapercanbeveryexpensiveforcompanieswithpoorcreditratings,andmayevendryupentirely.Also,liquidityinthecommercialpapermarketvariesovertime.Forexample,duringtheRussiancrisisin1998,commercialpaperbecameveryexpensive.Theadvantageofthebankloanisthatthecompanyissureoftheavailabilityofthemoneyforfiveyearsandisalsocertainregardingthemarginabove271khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com theprimerate.Itisalsoimportanttonotethatthecommercialpaperwillneedtobebackedbyalineofcredit,whichwillincreaseitscost.•Thefloatingrateloanfromthebankappearstobecheaperthanthe11%fixedrateloanfromtheinsurancecompany,butitisimportanttorememberthatthedifferencebetweenfixedandfloatingratesmayindicateanexpectationofaraterise.•Thechoicebetweenthefixed-rateandthefloating-rateloansmayalsodependonwhetheroneortheotherbetterhedgesthefirm’sexposuretointerestrates.Forexample,ifthefirm’sincomeispositivelyrelatedtointerestratelevels,itmightmakesensetoborrowatafloatingrate;thatis,whenthefirm’sincomeislow,itscostofdebtserviceisalsolow.khdaw.com课后答案网www.hackshp.cn272khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER32MergersAnswerstoPracticeQuestions1.Answersherewillvary,dependingonstudentchoice.2.Answersherewillvary,dependingonstudentchoice.3.a.Thisisaversionofthediversificationargument.Thehighinterestratesreflecttheriskinherentinthevolatileindustry.However,ifthemergerkhdaw.comallowsincreasedborrowingandprovidesincreasedvaluefromtaxshields,therewillbeanetgain.b.TheP/Eratiodoesnotdetermineearnings.Theefficientmarketshypothesissuggeststhatinvestorswillbeabletoseebeyondtheratiototheeconomicsofthemerger.c.Therewillstillbeawealthtransferfromtheacquiringshareholderstothetargetshareholders.4.Supposethemarketvalueoftheacquiringfirmis$150millionandthevalueof课后答案网thefirmwithamergeris$200million.Iftheprobabilityofamergeris70%,thenthemarketvalueofthefirmpre-mergercouldbe:($150×0.3)+($200×0.7)=$185millionIftheacquiringmanagersusedthisvalue,theywouldunderestimatethevalueofwww.hackshp.cntheacquisition.5.Thisisaninterestingquestionthatcentersonthesourceoftheinformation.IfyouobtaintheinformationfromsomeoneatBackwoodsChemicalwhomyouknowhasaccesstothisvaluableinformation,thenyouareguiltyofinsidertradingifyouactuponit.However,ifyoucomeacrosstheinformationasaresultofanalysisyouhavedoneorresearchyouhaveperformed(whichanyonecouldhavedone,butdidnotdo),thenyouarefreetoactupontheinformation.273khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 6.a.Usetheperpetualgrowthmodelofstockvaluationtofindtheappropriatediscountrate(r)forthecommonstockofPlastitoys(CompanyB):0.80=20⇒r=0.10=10.0%r−0.06Undernewmanagement,thevalueofthecombination(AB)wouldbethevalueofLeisureProducts(CompanyA)beforethemerger(becauseCompanyA’svalueisunchangedbythemerger)plusthevalueofPlastitoysafterthemerger,or:⎛$0.80⎞PV=(1,000,000×$90)+600,000×⎜⎟=$114,000,000AB⎜⎟⎝0.10−0.08⎠khdaw.comWenowcalculatethegainfromtheacquisition:Gain=PV−(PV+PV)ABABGain=$114,000,000−($90,000,000+$12,000,000)=$12,000,000b.Becausethisisacashacquisition:Cost=CashPaid–PVB=($25×600,000)–$12,000,000=$3,000,000c.Becausethisacquisitionisfinancedwithstock,wehavetotakeintoconsiderationtheeffectofthemergeronthestockpriceofLeisureProducts.Afterthemerger,therewillbe1,200,000sharesoutstanding.课后答案网Hence,thesharepricewillbe:$114,000,000/1,200,000=$95.00Therefore:www.hackshp.cnCost=($95×200,000)–($20×600,000)=$7,000,000d.Iftheacquisitionisforcash,thecostisthesameasinPart(b),above:Cost=$3,000,000Iftheacquisitionisforstock,thecostisdifferentfromthatcalculatedinPart(c).Thisisbecausethenewgrowthrateaffectsthevalueofthemergedcompany.This,inturn,affectsthestockpriceofthemergedcompanyand,hence,thecostofthemerger.Itfollowsthat:PVAB=($90×1,000,000)+($20×600,000)=$102,000,000Thenewsharepricewillbe:$102,000,000/1,200,000=$85.00Therefore:Cost=($85×200,000)–($20×600,000)=$5,000,000274khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 7.a.Wecompletethetable,beginningwith:Totalmarketvalue=$4,000,000+$5,000,000=$9,000,000Totalearnings=$200,000+$500,000=$700,000Earningspershareequalto$2.67impliesthatthenumberofsharesoutstandingis:($700,000/$2.67)=262,172.Thepricepershareis:($9,000,000/262,172)=$34.33Theprice-earningsratiois:($34.33/$2.67)=12.9b.WorldEnterprisesissued(262,172–100,000)=162,272newsharesinordertotakeoverWheelrimandAxle,whichhad200,000sharesoutstanding.Thus,(162,172/200,00)=0.81sharesofWorldEnterpriseskhdaw.comwereexchangedforeachshareofWheelrimandAxle.c.WorldEnterprisespaidatotalof(162,172×$34.33)=$5,567,365forafirmworth$5,000,000.Thus,thecostis:$5,567,365–$5,000,000=$567,365d.Thechangeinmarketvaluewillbeadecreaseof$567,365.8.Inatax-freeacquisition,thesellingshareholdersareviewedasexchangingtheirsharesforsharesinthenewcompany.课后答案网Inataxableacquisition,thesellingshareholdersareviewedassellingtheirshares.Whethertheacquisitionistax-freeortaxablealsoaffectstheresultingfirm’staxposition.Iftheacquisitionistax-free,thefirmsaretaxedasthoughtheyhadalwaysbeentogether.Iftheacquisitionistaxable,theassetsofthesellingfirmarerevalued,whichmayproduceataxablegainorlossandwhichaffectsfuturedepreciation,and,hence,www.hackshp.cndepreciationtaxshields.Itfollowsthatbuyersandsellerswillonlyagreetoataxablemergerwhenthetaxbenefitstoonegroupoutweighthetaxlossestotheotherandsomemiddlegroundisagreedupon.9.Table32.3becomes:NWC2130DFA9288EGoodwill5118118Iftheacquisitionistax-free,thenthevalueofABCorporationdoesnotchange.Iftheacquisitionistaxable,therevaluationoffixedassetsincreasestheallowabledepreciation,butthewrite-upinassetvalueisataxablegain.ThisreducesthevalueofAB.275khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 10.ThecommonthemeinPickens’sattemptswastoforcemanagementtooperatethebusinessesinawaythatmaximizedshareholders’wealth.Throughtake-overattempts,Pickensforcedmanagementtore-examineoperationsandtofindwaystocutoperatingcosts,eliminatenegativeNPVprojectsandreturncashtotheshareholders.Thisusuallyinvolvedsharerepurchaseswhichincreasedthemarketvalueofthefirm.Onthewhole,thisisanexampleofthemarketdiscipliningafirmtobecomemoreefficient.khdaw.com课后答案网www.hackshp.cn276khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com ChallengeQuestions1.Answersherewillvary,dependingonstudentchoice.2.Answersherewillvary,dependingonone’sviewsoftheproperroleofgovernment,aswellasone’sviewsoftheroleoffinancialmarkets.khdaw.com课后答案网www.hackshp.cn277khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER33CorporateRestructuringAnswerstoPracticeQuestions1.a.True.Carve-outorspin-offofadivisionimprovesincentivesforthedivision’smanagers.Ifthebusinessesareindependent,itiseasiertomeasuretheperformanceofthedivision’smanagers.b.False.Thelimitedlifeofaprivate-equitypartnershipreassuresthelimitedpartnersthatthecashflowwillnotbereinvestedinawastefulmanner.Italsotendstoensurethatpartnershipsfocusonopportunitiestoreorganizekhdaw.compoorlyperformingbusinessesandtoprovidethemwithnewmanagementbeforesellingthemoff.c.True.Theremunerationpackageforthegeneralpartnerstypicallyincludesa20%carriedinterest.Thisisequivalenttoacalloptiononthepartnership’svalueand,asisthecaseforalloptions,thisoptionismorevaluablewhenthevalueoftheassetsishighlyvariable.2.Ingeneral,firmswithnarrowmarginsinhighlycompetitiveenvironmentsarenotgoodcandidatesforanLBOoranMBO.Thesefirmsareoftenhighlyefficientanddonothaveexcessassetsorunnecessarycapitalexpenditures.Further,课后答案网thethinnessofthemarginslimitstheamountofdebtcapacity.3.RJRissuedalotofdebtandrepurchasedsharestoreducetheequitybase.www.hackshp.cnSealedAirissuedalotofdebtandpaidaspecialdividendtoallshareholderstoreducetheequitybase.RJRwasseenasacompanythatneededtostreamlineoperationsandreexamineitscapitalexpendituresandassetholdings.Thefirmwasinahighlycompetitiveenvironment,buthadtheadvantageofbrandnamerecognitionforitsproducts.SealedAirneededtostreamlineitsoperationsbecauseithadgrowninefficientduetothepatentprotectionithadforitsproducts.SealedAirremainedpublicinordertoincreasethepressuretoperformbyremainingexposedtobuyingandsellingpressureinthemarket.4.Answerswillvarydependingupontheexampleschosen.278khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.ThestorytoldinBarbariansattheGateisaverycomplicatedone.Thosewhofavormergerscanfindmuchevidenceinthisstorytosupporttheirposition,ascanthosewhoopposemergers.Inasimilarfashion,thosewhoespouseoneparticulartheoryoranotherastowhycompaniesmergecanfindevidenceheretosupporttheirposition(andevidencetorefutethepositionsofothers).Thus,theanswerwillvary,dependingonone’sviews.6.Privateequitypartnershipsareusuallyrunbyprofessionalequitymanagersrepresentinglargerinstitutionalinvestors.Theinstitutionalinvestorsactasthelimitedpartnerswhiletheprofessionalmanagersactasgeneralpartnersinthelimitedpartnership.Thegeneralpartnersarecompaniesthatfocusonfundingkhdaw.comandmanagingequityinvestmentsinclosely-heldfirms.Theincentiveforgeneralpartnersisamanagementfeeplusashareinthecompanyprofitsthattheycanincreaseiftheysuccessfully“fix”thefirm.Thelimitedpartnersgetpaidfirstbutarenotentitledtoalltheprofits.Further,thelimitedlifeofthepartnershipprecludeswastefulreinvestment.Thesepartnershipsaredesignedtomakeinvestmentsinvarioustypesoffirmsfromventurecapitalstart-upstomaturefirmsthatneedtore-invigoratemanagement.7.Althoughagencycostscanbesignificantforpubliccompanies,anyonewhohasdealtwithagovernmentalinstitution(or,forthatmatter,anon-profitorganization)hasundoubtedlyexperiencedthefargreaterproblemofagencycostsinorganizationsoutsidetheprivatesector.课后答案网Privatizationcansubstantiallyreducethesecosts,resultinginmuchgreaterefficiency.Competitionintheprivatesectorimposesagreaterdisciplinewithintheenterprise,whilealsoeliminatingtheimpactofpoliticalinfluence.Managementandotheremployeesareoftenofferedstrongerincentivesinaprivatwww.hackshp.cneenterprisethanwouldbepossibleinagovernmentalorganization.8.ManyoftheproblemswithChapter11bankruptcycouldbemitigatedbynegotiatingaprepackagedbankruptcy.ManyproblemsarisefromthefactthatthetwogoalsofChapter11bankruptcyareofteninconflictwitheachother:(1)tosatisfycreditorsand(2)toallowthefirmtoresolveitsproblemsandcontinuetofunctionasanongoingbusiness.Furthermore,thereareconflictswithinthedifferentclassesofsecuritiesholders.Seniorcreditorstendtofavoraliquidationofthecompanysothattheirclaimswillbesatisfiedimmediately,whilejuniorcreditorsfavorareorganizationofthebusinessinthehopethattheywillreceivesomeportionoftheirclaims.Thereisalsoaconflictbetweensecuredcreditors,whoreceiveinterestwhilethecompanyisinChapter11bankruptcy,andunsecuredcreditorswhodonotreceiveinterest.Thesenumerousconflictsincreasethelikelihoodthatextensivelitigationwilldrainresourcesfromthecompanywhiletheseissuesareresolved.Aprepackagedbankruptcyresolvestheseissueswithanegotiatedsettlement.279khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com CHAPTER34GovernanceandCorporateControlAroundtheWorldAnswerstoPracticeQuestions1.a.Whileitistruethatmanagershaveafiduciarydutytoshareholders,itishumannatureformanagerstoputtheirowninterestsaheadofthoseofthestockholderswhenthereisaconflictinobjectives.Itisimpossibleforstockholderstomonitortheactionsofallmanagersatalltimes,soagencyproblemsareinevitable.b.Thetypesofmechanismsusedtokeepagencyproblemsundercontrolgenerallyinvolvemonitoringofmanagement,contractsthatrelatekhdaw.commanagementcompensationtofirmperformance,andmarketmechanismssuchastakeoverthreatsandcompetitioninthemarketformanagerialemployees.2.Otherfinancialintermediariesincludeinsurancecompanies,mutualfundsandpensionfunds.InJapan,banksproviderelativelymorefinancingthandootherfinancialintermediaries,whileintheU.K.,otherfinancialintermediariesprovidesubstantiallymorefinancing.IntheU.S.,banksarelessimportantsourcesoffinancingcomparedtofinancialintermediaries,andinEurope,financingprovidedbybanksandfinancingprovidedbyotherfinancialintermediariesareapproximatelyequal.课后答案网3.Transparencyisessentialinamarket-basedsystem,butisnotnecessarilyarequirementforabank-basedsystem.Inabank-basedsystem,bankshavewww.hackshp.cnlong-standingworkingrelationshipswiththecompaniesseekingfinancing,andbankshaveon-goingaccesstoinformationaboutthefirm.Inamarket-basedsystem,creditorsandequity-holdersrequirethatfinancialinformationaboutcompaniesseekingfinancingbeavailable,sufficientlydetailedandaccurateiftheyaretoparticipateinthemarket.Thisinformation,includingauditedfinancialstatements,allowsparticipantsinthemarkettomakejudgmentsaboutafirm’sprofitabilityandprospectsforthefuture.Withoutthisinformation,investorsarenotwillingtoparticipateinthefinancialmarkets.4.Acompanywithdual-classequityhastwoclassesofcommonstockwithdifferentvotingrights.Oneofthebestknownexamplesofacompanywithdual-classequityisFordMotorCompany;theFordfamilyownsaclassofcommonstockwithextravotingrights,whichallowsthefamilytocontrolthecompany.280khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com 5.Newindustriesseemtodevelopinmarket-basedfinancialsystemssuchastheU.S.,whilebank-basedsystems,suchasJapanandGermany,seemtobesuccessfulinsustainingestablishedindustries.Theautomobileindustry,forexample,grewanddevelopedintheU.S.,butJapanandGermanyhavesustainedacompetitiveadvantageinrecentdecades.Asnewindustriesorproductsdevelop,thereoftenappeartobeseveralpotentialavenuesfordevelopment;eachrequiringsignificantamountsoffinancingbeforetheeventualindustryleadersemerge.Abank-basedsystemisnotlikelytoprovidethisearly-stagefinancingbecauseoftheuncertaintyinvolved,butamarket-basedsystemprovidesfinancingfromnumerousinvestorswithdifferentviewsregardingprospectsfordevelopment.Market-basedsystemsalsoseemtobemoreeffectiveineliminatingdecliningfirmsandindustries.khdaw.com6.Pyramidsallowawealthyfamily,forexample,tocontrolagroupofcompanieswitharelativelysmallinvestment.Thisallowsthefamilytodiversifytheirholdingswhilemaintainingcontrolofthegroup.IntheU.S.,investorscandiversifytheirholdingsinthefinancialmarkets,soapyramidoraconglomerateisnotnecessarilyadesirablealternative.Indevelopingcountries,however,thesubstandardfinancialmarketsdonotprovideadesirablemechanismfordiversificationandexpansion.7.AJapanesekeiretsuisanetworkofcompanieswithcross-holdingsand课后答案网numerousinterrelationships.Theseincludelong-standingrelationshipsamongthecompaniesinthekeiretsu,andbetweenthecompaniesandthebankthatisoftenassociatedwiththekeiretsu.Theadvantagesofthisformoforganizationincludetheabilitytoobtaindebtfinancingfromthekeiretsu’sbankorfromotherwww.hackshp.cnaffiliatedfinancialinstitutions.Financingcanalsobeobtainedfromothercompaniesinthekeiretsu,avoidingtheneedforexternalfinancing.Keiretsustendtohaverelativelystablecashflowsandareoftenabletoresolveissuesrelatedtothefinancialdistressofacompanyinthekeiretsu.Adisadvantageofthisformoforganizationisthefactthatoutsideshareholdershavelittle,ifany,influenceonthecompaniesinthekeiretsu.Asaresult,dividendsarerelativelylowandtakeoversareextremelyrare.281khdaw.com若侵犯了您的版权利益，敬请来信通知我们！℡www.khdaw.com'